^    <^l 


PRACTICAL  BANKING 

WITH  A  SURVEY 

OF    THE 

FEDERAL  RESERVE   ACT 


BY 


RALPH  SCOTT  HARRIS 


BOSTON    NEW  YORK    CHICAGO 

HOUGHTON  MIFFLIN  COMPANY 


COPYRIGHT,    1915,    BY   RALPH   SCOTT  HARRIS 
ALL  RIGHTS  RESERVED 


CAMBRIDGE  .  MASSACHUSETTS 
U    .    S    .   A 


•   *  • 


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t  «  •           I     t     t 

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«  «  C    «  C    I              , 


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I  •  * 


3 

J 


DEDICATED    TO   MY 
MOTHER  AND  FATHER 


PREFACE 

In  putting  this  volume  before  the  public,  the 
writer  has  in  mind  at  least  two  purposes  which  he 
hopes  to  fulfill:  (1)  to  draw  with  certain  accuracy 
of  detail  a  plan  of  the  structure  —  the  mechan- 
ism—  of  the  modern  bank  in  America;  (2)  to 
reduce  all  this  to  untechnical  language  and  yet 
include  suflficient  of  exact  financial  information  to 
enable  the  "layman"  who  is  interested  in  the 
general  methods  of  banking  to  grasp  the  subject 
substantially  without  laborious  and  endless  effort. 

There  is  no  subject,  not  essentially  fiction, 
which  yields  such  stimulating  or  romantic  reac- 
tions as  the  study  and  practice  of  banking.  In- 
deed, writers  on  the  matter  are  more  wont  to  use 
literary  imagery  than  are  delineators  of  science 
in  general.  Thus,  one  speaks  of  London  as  "the 
financial  Rome  of  civilized  nations,"  while  an- 
other says  that  between  the  gold  reserves  on  "the 
face  of  the  earth  "  there  is  "the  same  aflSnity  as 
between  the  blood  corpuscles  circulating  in  the 
organism." 

The  very  words  "Wall  Street,"  "Lombard 
Street,"  "Threadneedle  Street,"  "The  Bourse" 
suggest  the  boundless  optimism  of  man,  his 
(often)  day-dreams  and  visions,  his  plans  dashed 
to  fragments  or  culminating  in  success.  After  all, 
finance  is  so  intimate  to  every  one  of  us  we  cannot 
but  find  an  innate  interest  in  the  contemplation 
of  it.   The  prosperity  of  nations  is  closely  bound 


VI  PREFACE 

up  in  the  success  or  failure  of  its  banking  system. 
Thus  a  writer,  speaking  of  the  necessity  of  guard- 
ing in  some  way  the  metalHc  reserve  required  for 
a  country's  own  banking,  says:  "When  a  nation, 
carried  away  by  the  bhnd  confidence  of  an  already 
long  period  of  easy  credit  and  great  prosperity, 
neglects  more  and  more  the  metallic  basis  and  the 
progress  of  other  nations  toward  a  clearing  sys- 
tem, and  thinks  it  can  forever  increase  credit  and 
exalt  speculation,  the  crisis  is  at  hand  and  will 
suddenly  appear;  then,  as  the  penalty  for  ignor- 
ing the  necessarily  slow  processes  of  evolution, 
it  must  submit  to  the  humiliation  of  asking  the 
world  for  help."  ^ 

But,  curiously  enough,  finance  is  blind  to  such 
considerations  as  patriotism  and  money  seeks  its 
best  market,  be  it  where  it  may.  This  levels  the 
supply  of  gold  in  a  country  to  what  is  necessary 
and,  as  Mr.  Patron  points  out,  results  in  an 
ironical  situation  often  enough.  He  cites  the 
transfer  of  two  hundred  million  francs  into  France 
as  the  result  of  buying  the  Panama  Company. 
This  money,  it  seems,  had  largely  come  to  the 
United  States  from  Japan  in  payment  of  war 
material.  France  loaned  a  large  part  of  it  to 
Russia,  and  we  had  Japan  actually  furnishing 
gold  to  her  enemy. 

This  little  volume,  however,  is  not  concerned 
in  particular  with  world  finance,  but  rather  with 
the  interior  conduct  of  the  average  American 
bank.  I  have  sought  to  make  it  intimate  and,  as 
far  as  it  was  interesting  and  profitable,  to  intro- 

^  Maurice  Patron,  The  Bank  of  France,  in  the  National  Mone- 
tary Commission  Series. 


PREFACE  vii 

duce  the  reader  to  some  of  the  officers  and  officials 
of  the  bank,  acquaint  him  with  their  duties,  and, 
in  fine,  describe  the  actual  conduct  of  banking 
from  the  mechanistic  side.  There  are  also  several 
chapters  dealing  with  more  general  phases  of 
banking,  such  as  that  concerning  "What  is  a 
Bank?"  and  the  chapters  on  "The  Clearing 
House,"  "National  Bank  Currency,"  "Foreign 
Exchange,"  and  "The  Federal  Reserve  Act." 

The  writer  does  not  presume  to  have  said  the 
final  word  on  banking;  indeed,  he  only  assumes 
a  certain  originality  as  far  as  his  observations  and 
treatment  are  concerned.  On  the  other  hand,  he 
has  not  altogether  depended  on  his  own  experi- 
ence, but  has  sought  the  advice  of  numerous  prac- 
tical banking  men  in  New  York  and  elsewhere, 
and  has,  moreover,  searched  the  writers  for  con- 
firmation of  his  theories  or  for  additional  infor- 
mation. A  working  bibliography  on  banking  is 
appended  to  this  book.  A  number  of  other  books, 
not  specially  consulted  by  the  author  for  this 
book,  are  referred  to  in  various  places  throughout 
the  work. 

Finally,  the  main  object  of  this  work  must  not 
be  forgotten,  namely,  that  it  is  intended  for  the 
student  of  finance  who  wishes  a  glimpse  into  the 
practical  conduct  of  the  bank  or  for  the  business 
man  who  daily  has  relations  with  the  bank  and 
yet,  as  is  most  natural,  is  unfamiliar  with  the 
details  of  this  most  important  institution  of 
modern  civilization. 

The  personal  acknowledgments  of  the  author 
in  the  preparation  of  this  little  labor  of  love  are 


viii  PREFACE 

many  and  the  obligations  real.  Without  those 
whose  names  follow,  the  book  would  not  have 
been  possible. 

To  Professor  John  Erskine,  of  Columbia  Uni- 
versity, I  owe  most  in  this  undertaking.  It  was  he 
who  first  suggested  it,  and  his  patient  criticism  of 
the  structure  of  the  book  was  invaluable.  Mr. 
John  H.  Frye,  president  of  the  Traders'  National 
Bank,  of  Birmingham,  Alabama,  is  responsible  for 
several  years  of  discipline  and  experience,  wherein 
I  received  a  first  practical  insight  into  bank  meth- 
ods, and  for  innumerable  courtesies.  The  late 
J.  H.  McEldowney,  formerly  vice-president  of 
the  National  City  Bank  of  New  York,  was  of 
great  assistance  to  my  book  in  its  inception.  Hon. 
Oscar  W.  Underwood  assisted  me  with  the  com- 
plete report  of  the  National  Monetary  Commis- 
sion and  valuable  documents  relating  to  the 
Federal  Reserve  Act.  Mr.  H.  H.  Powell,  cashier 
of  the  Importers'  and  Traders'  National  Bank  of 
New  York,  and  Mr.  William  Scherer,  manager  of 
the  New  York  Clearing  House,  furnished  me  with 
definite  information  in  their  respective  fields.  Mr. 
William  E.  Hollo  way,  banker.  New  York,  read 
the  manuscript  and  criticized  it,  as  did  Professor 
Charles  A.  Beard,  of  Columbia  University,  Mr. 
H.  E.  Davisson,  formerly  of  the  Foreign  Depart- 
ment of  the  National  City  Bank,  New  York,  and 
Mr.  Olaf  Olsen,  vice-president  of  the  First 
National  Bank  of  Boston.  The  Librarian  of 
Congress  provided  a  bibliography  on  currency 
legislation.  I  am  indebted  to  Mr.  F.  R.  Macau- 
lay,  Columbia  University,  for  suggestions.  Mr. 
Frederic  Erb,  Supervisor  of  the  Loan  Division, 


PREFACE  ix 

Columbia  University  Library,  was  untiring  in 
his  courtesies  from  time  to  time.  I  gratefully 
acknowledge  the  assistance  of  Mr.  Stanley  V. 
La  Dow,  New  York,  in  reading  the  proofs  of 
this  volume. 

Those  whose  books  have  proven  more  than 
valuable  in  preparing  this  work  are  too  numerous 
to  mention  and  must  be  looked  for  in  the  biblio- 
graphy. However,  I  will  make  particular  mention 
of  the  following:  Charles  A.  Conant,  A  History 
of  Modern  Banks  of  Issue;  Wesley  C.  Mitchell, 
Business  Cycles;  James  G.  Cannon,  Clearing 
Houses;  and  articles  by  Paul  M.  Warburg. 

Ralph  Scott  Harris. 

Columbia  University, 
October  2, 1914. 


CONTENTS 

I.  What  is  a  Bank? 1 

n.  The  Stockholders  and  the  Board  of  Di- 
rectors     28 

m.  The  President 35 

IV.  The  Cashier 43 

V.  The  Paying  Teller 51 

VI.  The  Receiving  Teller 61 

Vn.  The  Loan  and  Discount  Department       .    73 
Vm.   The  Foreign  Cash  Items  or  Transit  De- 
partment   84 

IX.  The  Collection  Department         ...    91 
X.  The  Domestic  Exchange  Department       .    97 

XI.  The  Individual  Ledger 104 

Xn.  The  Reciprocal  or  Bank  Ledger        .      .110 

XIII.  The  General  Books 118 

XIV.  The  Savings  Department         ....  123 
XV.  The  Formation  and  Powers  of  the  Na- 
tional Bank: 134 

XVI.  National  Bank  Notes 146 

XVII.  The  Clearing  House 161 

XVin.  Foreign  Exchange 178 

XIX.   Crises  in  the  United  States         .      .      .211 
XX.   The  Federal  Reserve  Act       ....  258 

Appendix 289 

Bibliography 297 

Index 301 


PEACTICAL  BANKING 


CHAPTER  I 

WHAT  IS  A  BANK? 


When  one  ascends  marble  steps  into  some 
wonder  of  the  American  builder's  art;  as  he  moves 
through  offices  magnificently  finished,  seeing  here 
a  long  line  of  wickets,  each  manned  by  a  well-kept 
teller,  who  waits  on  the  public;  behind  them  a 
vast  crowd  of  bookkeepers,  listers,  watchmen, 
collectors,  and  messengers;  as  he  sees  there  desk 
after  desk  occupied  by  suave,  sharp-eyed  officers 
and  assistants;  as  he  notes  with  what  smoothness, 
what  consummate  ease  the  business  is  divided 
and  handled,  like  some  huge  power-machine, 
made  of  the  best  metal,  —  he  is  struck  with 
admiration  for  a  thing  so  immense,  so  far- 
reaching,  yet  so  graceful  and  perfect.  It  is  diffi- 
cult to  imagine  that  the  science  which  it  is  prac- 
ticing and  developing  —  the  science  of  banking 
and  finance  —  had  a  beginning  long,  long  ago, 
and  that  in  the  beginning  it  was  a  tiny,  rude, 
undeveloped  happening,  not  even  a  definite 
calling. 

Our  task,  in  this  chapter,  will  be  to  give,  in  a 
brief  and  succinct  sketch,  the  origin  and  progress 
of  banking.  It  is  not  within  our  province  to  go 
very  deeply  into  the  details  of  this  theme,  which 


2  PRACTICAL  BANKING 

itself  might  fill  several  portly  volumes.  But  the 
intention  is  to  cover  generally  the  historical  devel- 
opment of  the  bank,  touching,  however,  only  the 
great  peaks,  and  to  discuss  the  modern  bank,  and 
particularly  the  National  Bank,  in  the  United 
States. 

Those  principles  which  underhe  banking  or 
finance,  as  we  know  it,  have  been  applied  since 
the  first  day  men  began  to  cooperate  with  each 
other.  ^  It  is  the  process  of  obtaining  some  desired 
article  for  an  article  which  can  be  more  easily 
spared.  In  those  days  there  was  no  fixed  stand- 
ard, like  our  currency,  by  which  articles  could 
be  compared.  Consequently,  nothing  like  a  regu- 
lar market  could  be  instituted;  each  transaction 
stood  on  its  own  merit.  There  was  exchange  of 
articles  which,  on  account  of  their  practically 
equal  utility  to  those  trading,  were  of  an  equal 
commercial  value.  But  this  exchange  was  and  is 
the  basis  of  our  banking  system.  As  soon  as  you 
substitute  the  abstract  for  the  concrete,  the  pay- 
ment or  the  promise  to  pay  in  an  accepted  medium 
for  actual  payment  with  an  article  of  a  practically  , 
equal  trading  value,  you  have  a  modern  banking 
system. 

In  the  rudest  and  most  barbarous  people  of 
whom  we  have  any  historical  record,  glimpses  of 
the  employment  of  these  general  laws  may  be  had. 
At  first,  it  was  a  very  simple  exchange.  A  man 
had  a  very  desirable  dog,  slave,  or  ox  which  he 

^  The  ultra-radical  would  say  that  they  had  been  applied,  not 
from  the  day  men  commenced  cooperating,  but  from  that  day  when 
the  stronger  began  to  oppress  the  weaker.  I  refrain  from  any  com- 
ment on  this  distinction. 


WHAT  IS  A  BANK?  3 

would  trade  for  a  weapon,  a  skin,  or  a  woman  to 
work  for  him.  Gradually  rare  substances,  because 
of  their  comparatively  little  bulk  or  weight,  be- 
came the  more  generally  accepted  medium  of 
exchange,  of  which  gold,  silver,  and  bronze  finally 
became  the  most  common.  That  is,  instead  of  a 
man  waiting  until  his  heifer  had  become  a  full- 
grown  cow,  which  he  might  "swap"  for  a  wife,  he 
took  an  appropriate  quantity  of  the  medium, 
which  he  had  obtained  by  digging  or  trading,  and 
made  the  exchange. 

By  slow  degrees  —  for  these  evolutionary  pro- 
cesses, it  must  be  understood,  were  matters  of 
many  centuries  of  gradual  development  —  people 
came  to  feel  the  inconvenience  of  carrying  around 
coin  or  bullion  in  any  quantity.  Doubtless  this 
was  felt  to  an  extraordinary  degree  in  the  city 
where  iron  was  declared  the  standard  money. 
So,  finally,  but  with  as  much  tardiness  and  suspi- 
cion as  that  which  attended  Charles  Lamb's 
Chinese  learning  to  roast  pig  without  burning 
down  a  house,  they  became  satisfied  to  accept, 
in  place  of  money,  the  written  promise  to  pay  a 
specified  sum  at  a  definite  time  and  place,  and 
they  had  the  genesis  of  paper  currency.  This 
paved  the  way,  ultimately,  for  the  creation  of  the 
bank,  the  check,  and  the  currency  bill. 

The  function  of  banking  which  has  to  do  with 
the  extending  of  loans  is  spoken  of  in  the  far 
depths  of  history.  In  the  early  chronicles  of  the 
Hebrews  are  found  injunctions  against  the  taking 
of  usury.  But  this,  undoubtedly,  preceded  the 
actual  business  of  lending.  Then  it  was  but  the 
occasional  lending  by  any  man  so  inclined  to  one 


4  PRACTICAL  BANKING 

who  wished  to  borrow.  In  other  words,  it  was  not 
yet  a  definite  calHng. 

Banking,  crude  but  genuine,  may  go  back  as  far 
as  a  thousand  years  before  Christ.  Prior  to  that 
we  have  no  assurance.  It  is  probable  that  no 
institutional  or  private  banking  took  place  before 
that  date,  for,  although  it  is  estimated  that  man 
has  been  in  his  present  physical  and  mental  stage 
for  something  like  250,000  or  300,000  years,  it  is 
only  within  the  last  5000  or  6000  years  that  he 
has  accumulated  enough  experience  —  handed 
down  mostly  by  tradition  —  to  enable  him  to 
begin  cooperative  institutions.  Taking,  then,  the 
familiar  clock  illustration,  if  the  face  represents 
250,000  years,  it  has  only  been  possible  for  banks 
to  exist  a  httle  over  a  minute  now,  and  the 
national  bank  in  the  United  States  is  not  quite  a 
second  old. 

Assyria,  as  early  as  the  seventh  and  even  the  ninth 
century  before  Christ,  possessed  a  system  of  commer- 
cial instruments,  which  included  promissory  notes, 
bills  of  exchange,  and  transfer  checks,  not  unlike  the 
modern  bank  check.  As  this  system  was  in  operation 
before  the  use  of  coined  money,  these  documents  usu- 
ally stipulated  for  the  payment  of  a  given  weight  of 
silver  or  copper.  They  were  not  inscribed  on  paper, 
but  on  small  clay  tablets  about  the  size  of  a  piece  pf 
toilet  soap.  After  the  contract  had  been  written  in  the 
soft  earth,  it  was  baked  so  as  to  render  it  unalterable 
and  indestructible.  Such  a  form  of  paper  naturally 
could  not  be  subjected  to  indorsement  or  acceptance 
hke  modern  commercial  paper;  but  this  defect  was 
supplied  by  the  presence  of  witnesses,  usually  having 
a  religious  or  legal  authority.  The  original  was  placed 
Jov  safe-keeping  in  either  the  temple  or  the  record  room 


WHAT  IS  A  BANK?  5 

of  the  city,  inclosed  in  a  clay  envelope  or  case,  while 
copies  went  to  one  or  both  of  the  contracting  par- 
ties.^ 

Banking  flourished  in  ancient  Greece  and  Rome, 
though  it  was  not  a  patrician  calling.  It  exercised 
nearly  all  the  fundamental  functions  of  later 
banking,  except  the  issuance  of  circulating  notes. 
Deposits,  payable  on  demand  or  at  a  stipulated 
time,  were  received.  Sometimes  interest  was  paid 
on  these  deposits.  Bankers  derived  most  of  their 
profits  from  the  lending  of  money  at  a  high  rate. 
They  also  engaged  in  the  exchange  of  foreign 
money  for  that  of  Athens  and  Rome,  and  in  the 
buying  and  selling  of  bills  of  exchange.  Many 
complained  of  the  high  rates  of  interest,  but  bank- 
ers declared  that  they  had  to  charge  high  interest 
in  self-defense,  because  of  the  defective  laws, 

'  ^  Charles  A.  Conant,  A  History  of  Modern  Banks  of  Issue,  p.  1. 
Mr.  Conant  gives  the  best  account  of  the  history  of  banking  on  the 
market. 

It  is  a  fantastic  and  grotesque  picture  which  one  gets  by  mentally 
comparing  the  ancient  Assyrian  with  a  twentieth-century  New 
Yorker.  Say  "  Presto! "  and  suddenly  discover  yourself  an  interested 
onlooker  in  the  capital  of  some  old  potentate  like  Tiglath  Pileser  II 
about  three  thousand  years  ago.  Go  into  one  of  the  Oriental,  square, 
stone  houses  and  see  the  lender  and  the  borrower.  The  lender  is 
clothed  in  shabby  pale-yellow  robes,  unfaced  and,  alas,  unwashed. 
His  beard  is  that  of  Shylock  and  of  every  usurer  who  ever  lived.  He 
stands  weighing  out  small  blocks  of  silver  to  an  anxious,  nervous 
little  fellow,  type  of  the  perennial  money-borrower.  Now,  see  the 
skillful  fingers  of  Shylock  guiding  his  cuneus  through  the  wet  clay. 
"Put  the  note  on  in  two  layers  for  safety,"  suggests  little  Lamb, 
and  Shylock  glares.  Several  funereal  figures  in  spotless  white  have 
hovered  silently  by  all  the  time.  See  them  step  up,  examine  the 
tablet,  verify  the  weight,  accept  a  cash  offering  for  the  gods  from 
little  Lamb,  and  carry  away  the  note  to  bake  it  and  put  it  in  safe- 
keeping. Is  it  possible  that  the  priests  and  Shylock  exchange  know- 
ing looks?   No  matter!   Have  we  changed  so  much? 


6  PRACTICAL  BANKING 

which  gave  debtors  every  facility  for  escaping 
their  obligations. 

Mr.  Charles  A.  Conant^  has  very  interestingly 
pointed  out  that  usurious  rates  led  the  plebeians 
to  withdraw  to  the  Sacred  Mountain  in  494  B.C. 
and  to  the  Janiculum  in  278  b.c.  This,  however, 
does  not  seem  to  have  been  the  fault  of  the  regular 
money-lenders  at  Rome,  but  of  the  patricians  in 
their  business  intercourse  with  the  plebeians.  The 
evolution  of  banking  at  Rome  was  the  same  as 
everywhere  else.  "The  argentarii  (Roman  bank- 
ers) were  first  money-changers,  then  receivers  of 
deposits,  then  lenders  at  interest,  both  of  their 
own  money  and  of  that  entrusted  to  them,  and 
purchasers  of  bills  of  exchange." 

After  the  fall  of  the  Roman  Empire  in  the  West 
comes  a  gradual  retrenchment  of  banking  policy. 
This  was  a  natural  consequence  upon  the  upset 
economic  and  trade  conditions.  Banking,  even 
as  it  was  known  then,  was  dependent  upon  com- 
merce. Chaos  followed  the  conquest ;  the  arteries 
of  trade,  the  magnificent  Roman  military  roads, 
fell  into  neglect,  became  infested  by  robbers,  and 
were  little  frequented.  Secondly,  the  predatory 
character  of  the  unsettled  and  low-rumbling  cen- 
turies, known  as  the  "Dark  Ages,"  rendered 
private  property  unstable;  hence  did  away  with 
credit  security.  These  conditions  inevitably  drove 
metallic  money  to  shelter.  Therefore,  we  find  a 
financial  stagnation  and  chaotic  situation  in 
matters  of  banking  until  about  the  year  1100, 
when,  with  apparent  suddenness,  one  encounters 

*  Charles  A.  Conant,  A  History  of  Modern  Banks  of  Issue.   Mr. 
Conant  cites  Gustave  Cruchon,  Les  Banques  dans  V AntiquiU. 


WHAT  IS  A  BANK?  7 

a  reawakening  of  interest  in  cooperation  and 
institutions. 

Now,  when  banking  does  revive  in  western 
Europe,  it  is  seen  undergoing  the  same  process  of 
evolution  which  took  place  in  Assyria,  Greece, 
and  Rome.  It  began  with  the  money-changers. 
Many  people  have  called  the  famous  "Bank  of 
Venice"  (1171)  the  first  modern  bank;  but  it 
exercised  none  of  the  modern  bank's  functions. 
It  is  thought  that  the  word  "bank"  in  this  case 
simply  refers  to  two  forced  public  loans,  which 
gave  rise  to  this  institution  as  a  convenient 
method  of  repayment.^ 

Modern  banking,  however,  may  be  more 
directly  traced  to  the  money-lenders  of  Florence, 
who  flourished  with  a  high  reputation  in  the  thir- 
teenth century.  In  the  fourteenth  century  oc- 
curred the  failure  of  two  of  Europe's  greatest 
bankers,  and  for  a  time  there  was  widespread  dis- 
trust of  the  growing  profession.  But  bankers  had 
so  far  recovered  lost  ground  that  as  early  as  the 
first  generation  of  the  fifteenth  century  there  were 
eighty  banks  in  Florence,  although  none  were 
under  state  control. 

There  has  been  a  violent  dispute  as  to  the 
derivation  of  the  word  "bank"  as  we  know  and 
use  it.  Some  have  contended  with  much  specious- 
ness  that  our  word  comes  from  the  Italian 
"banco"  meaning  "bench,"  and  refers  to  the 
boards  which  the  money-changers  of  mediaeval 
Florence  used  as  counters.  These  show  that  when 
a  money-lender  failed,  his  bench  was  broken  in 

*  It  must  be  noted  in  a  moment  that  the  Bank  of  England 
originated  in  a  somewhat  similar  way. 


8  PRACTICAL  BANKING 

token  of  his  disgrace.  Hence,  from  the  words 
"banco"  and  "rotto,"  "to  break,"  we  get  our 
word  "bankrupt."  Another  faction  contends, 
with  perhaps  even  more  speciousness,  that  they 
have  no  reference  to  benches,  but  mean  "pubHc 
loans,"  a  German  word  having  been  substituted 
for  the  Itahan.^ 

Toward  the  end  of  the  sixteenth  century 
bankers  began  to  issue  promissory  notes  payable 
to  bearer,  which  passed  from  hand  to  hand  and 
had  a  limited  circulation.  The  institutions  put- 
ting such  notes  into  circulation  earned  the  name 
of  banks  of  issue.   In  comparatively  recent  years, 

^  Charles  A.  Conant,  A  History  of  Modern  Banks  of  Issue,  p.  8: 
"The  word  'bank'  is  derived  from  the  public  loans,  made  by  Italian 
towns,  rather  than  from  the  business  of  banking  as  understood  in 
later  times.  The  usual  Italian  word  for  a  public  loan  was  '  monte,' 
meaning  a  joint-stock  fund.  The  Germans,  who  were  influential  in 
the  Venetian  forced  loan  of  1171,  had  a  word  for  joint-stock  fund, 
'banck,'  which  meant  a  heap  or  mound.  This  the  Italians  converted 
into  '  banco '  and  used  for  an  accumulation  of  either  stock  or  money. 
The  word  was  later  adapted  for  English  usage  with  the  indifferent 
meaning  of  public  loan  or  stacks  of  money.  Benbrigge,  in  1646, 
speaks  of  the  'three  bankes'  of  Venice,  meaning  the  three  public 
loans  or  'monti.'  The  issue  of  paper  money  directly  by  the  state 
was  spoken  of  as  raising  a  'banke'  in  colonial  days  in  Massachusetts, 
the  word  '  bank '  standing  for  the  money  rather  than  the  institution." 

Henry  D.  MacLeod,  The  Theory  and  Practice  of  Banking,  vol. 
I,  p.  259:  "  It  is  popularly  supposed  (Gilbart's  Practical  Treatise  on 
Banking,  vol.  i,  p.  1)  that  the  word  Bank  comes  from  the  Italian 
word  banco,  a  bench  or  table,  because  the  money-dealers  or  money- 
changers kept  their  money  piled  on  benches  or  tables,  whence  it  is 
said  they  were  called  banchieri.  .  .  .  Nevertheless,  there  can  be  no 
possible  doubt  but  that  this  derivation  is  a  pure  illusion;  for  the 
money-changers,  as  such,  were  never  called  banchieri  in  the  Middle 
Ages." 

MacLeod  quotes  Blackstone  as  follows:  "At  Florence,  in  1344, 
Government  owed  £60,000,  and  being  unable  to  pay  it,  formed 
the  principal  into  an  aggregate  sum,  called,  metaphorically,  a  Mount 
or  Bank." 


WHAT  IS  A  BANK?  9 

however,  it  has  come  to  be  more  and  more  gener- 
ally believed  that  the  issuance  of  circulating  notes 
should  fall  within  the  province  of  the  Govern- 
ment, or  at  least  of  banks  under  state  control. 

Among  the  very  earliest  of  these  banks  of  issue 
was  the  Bank  of  Amsterdam,  which  in  the  seven- 
teenth century  received  deposits  of  gold  or  silver 
bullion,  for  which  it  issued  certificates  or  receipts. 
These  receipts  passed  from  person  to  person  and 
served  as  a  somewhat  rude  circulating  medium. 
They  were  redeemable  at  the  bank  in  the  metal 
which  they  represented  through  the  payment  of 
a  small  premium. 

This  very  famous  bank  was  formed  in  1609  un- 
der the  direction  of  the  city  and  was  governed  by 
a  secret  municipal  committee.  It  was  ostensibly 
founded  to  remedy  the  chaos  which  prevailed  in 
the  city  at  the  time  on  account  of  sharply  com- 
peting money-receivers  and  on  account  of  the 
confused  coinage.  Persons  were  forbidden,  by 
city  ordinance,  to  place  their  money  in  the  hands 
of  any  deposit-receiver  save  their  personal  agents. 
All  bills  of  exchange  were  required  to  be  negoti- 
ated through  the  new  bank.  The  bank  professed 
not  to  lend,  but  to  retain  in  its  coffers  the  actual 
money  deposited,  charging  a  small  percentage  for 
safe-keeping.  These  deposits  were  represented 
by  receipts  which  were  transferable.  Later,  the 
bank  accepted  deposits  of  foreign  coin  at  their 
intrinsic  value  and  issued  receipts  payable  in 
"gulden."  Upon  this  professed  basis  the  bank 
had  a  long  and  prosperous  career.  However,  it 
had  actually  violated  its  charter  within  a  half- 
century  after  its  foundation  by  allowing  consider- 


10  PRACTICAL  BANKING 

able  overdrafts,  and  in  the  eighteenth  century  it 
extended  huge  loans  to  the  Dutch  East  India 
Company.  The  depositors  learned  of  this  in  1790, 
and  in  1794  discovered  that  it  could  not  pay  its 
liabilities.  Its  notes  fell  from  a  premium  of  five 
per  cent  to  a  discount  of  sixteen  per  cent.  It  was 
governmentally  dissolved  in  1819,  and  its  place 
was  taken  by  the  Bank  of  the  Netherlands, 
founded  in  1814. 

Banking  methods  seem  to  have  been  introduced 
into  England  in  the  seventeenth  century  by 
London  goldsmiths,  who  probably  borrowed  them 
from  the  Dutch.  It  is  related  that  the  goldsmiths 
or  "new-fangled  bankers,"  as  they  were  called, 
soon  gained  such  a  foothold  that  they  were  able, 
at  considerable  profit  to  themselves,  to  supply 
Cromwell  with  funds  in  advance  of  the  revenues. 
At  the  time,  one  Sir  Josiah  Child  violently  at- 
tacked the  new  profession,  though,  curiously 
enough,  he  later  became  a  banker  himself,  and  his 
firm,  with  one  other,  are  the  only  private  houses 
still  in  existence  which  were  established  earlier 
than  the  Bank  of  England. 

The  Bank  of  England  was  organized  in  1694 
for  the  purpose  of  extending  a  loan  of  £1,200,000 
to  the  Government  for  public  service.  The  sub- 
scribers to  this  fund  were  to  receive  eight  per  cent 
per  annum  as  interest,  and  £4000  per  year  as 
running  expenses  for  the  bank.  How  this  institu- 
tion has  developed  into  the  greatest  financial 
agency  in  the  world,  controlling  the  discount 
rates  of  every  English  banking  house  and  setting 
the  foreign  exchange  rate,  will  be  spoken  of  from 
time  to  time  in  the  following  chapters. 


WHAT  IS  A  BANK?  11 

In  1619  the  Bank  of  Hamburg,  Germany,  was 
formed  on  the  same  principles  that  the  Bank  of 
Amsterdam  professed-  It  had  good  management 
throughout.  In  the  different  German  States, 
banks  were  formed  from  time  to  time  under  their 
own  pecuHar  laws.  In  1875  the  Imperial  Bank 
of  Germany  (the  "Reichsbank")  was  authorized, 
which  is  the  bank  of  Germany  to-day. 

At  present  there  are  about  one  hundred  and 
forty  banks  doing  business  in  Germany  aside  from 
the  government  banks.  For  it  must  not  be 
thought  that  the  "Reichsbank"  is  the  only  gov- 
ernment bank  in  the  empire,  though  it  is  undoubt- 
edly the  controlling  financial  agency.  The  five 
banks  having  the  right  of  uncovered  note  issue, 
with  the  amounts  permitted  to  be  issued,  are:  — • 

Imperial  Bank  of  Germany $115,000,000.00 

Bank  of  Saxony 4,000,000.00 

Bank  of  Bavaria 8,000,000.00 

Bank  of  Wurttemberg 2,500,000.00 

Bank  of  Baden. 2,500,000.00 

$132,000,000.00 

About  a  century  after  the  founding  of  the  Bank 
of  Hamburg,  —  1716,  to  be  exact,  —  John  Law 
organized  the  Banque  Generate  in  France.  It  was 
favored  by  the  Government  and  seemed  to  have 
in  store  a  promise  of  financial  and  economic  stim- 
ulation. But  Law  undertook  to  affiliate  it  with  his 
gigantic  "Occidental"  schemes,  and  in  1718  found 
it  necessary  to  ask  for  governmental  aid.  The 
institution  became  known  in  that  year  as  the 
Banque  Royale;  its  notes  were  guaranteed  by  the 
king.  But  Law's  "Mississippi  scheme"  was  too 
much,  and  though  advantages  were  offered  to 


12  PRACTICAL  BANKING 

those  who  paid  taxes  in  bank  bills,  and  though 
cash  money  was  forbidden,  confidence  so  fell  that 
in  1721  the  bank  was  closed,  through  the  influence 
of  Paris-Duverney,  Law's  bitterest  opponent.  In 
1767,  under  the  eminent  economist,  Turgot,  the 
bank  was  revived  and  existed  on  a  pretty  sound 
basis  till  it  became  involved  in  the  issuance  of 
assignats  during  the  Revolution  and  was  closed 
by  the  Convention  in  1793. 

No  financial  institution  was  again  attempted 
until  1800,  when  Napoleon  founded  the  present 
Bank  of  France.  A  solid  foundation  was  not  se- 
cured until  1806.  Its  capital  at  first  was  30,000,000 
francs.  It  made  large  loans  to  the  Provisional 
Government  and  to  the  city  of  Paris  in  1848,  and 
was  near  failure.  But  the  Government  came  to 
the  rescue,  allowing  it  to  stop  cash  payments  and 
declaring  its  notes  legal  tender. 

For  nearly  fifty  years  the  Bank  of  France  was 
only  one  of  a  number  of  banks  having  a  note 
issue.  Until  1848  departmental  banks  of  issue 
existed.  These,  however,  and  the  Bank  of  Savoy 
were  absorbed  by  1863;  since  then,  the  Bank  of 
France  has  been  supreme.  Its  capital  at  the  pres- 
ent time  is  182,500,000  francs,  held  by  about 
30,000  shareholders,  of  whom  about  10,000  do  not 
own  more  than  one  share.  It  has  had  a  vigorous 
administration  and  is  to-day  one  of  the  best  regu- 
lated financial  institutions  in  the  world.  It  has 
one  hundred  and  eighty-eight  branches  (comp- 
toirs)  and  two  hundred  and  seventy-nine  agen- 
cies. Every  class  has  derived  benefit  from  this 
bank,  but  none  more  than  have  the  agriculturists. 
This  is  because  the  bank  accepts  bills  as  low  as  $1 


WHAT   IS  A  BANK?  13 

and  loans  as  low  as  $50.  In  1906,  it  discounted 
$2,500,000,000  in  bills  and  loaned  $500,000,000 
on  securities.  Three  names  are  usually  required 
on  bills.  This  bank's  deposits  are  comparatively 
small,  being  only  $175,000,000.  But  it  has  an 
enormous  note  issue  —  $900,000,000  in  1906.  In 
its  vaults  (1906)  it  had  $575,000,000  in  gold  and 
$200,000,000  in  silver.  On  account  of  its  large 
cash  reserve,  it  can  keep  discount  rates  at  a 
rather  uniform  level.  From  1900  to  1906  the 
rate  (3%)  did  not  change.  Bank  of  France  notes 
are  more  popular  as  exchange  than  checks. 

With  regard  to  the  banking  history  of  the 
United  States,  only  a  few  words  are  necessary 
here.  Before  1776  there  was  very  little  attempt  at 
banking  for  commercial  purposes.  Many  crude 
attempts  were  made,  but  mainly  for  the  issuance 
of  paper  money.  However,  in  1740,  this  was 
stamped  out  by  the  extension  of  the  "Bubble 
Act"  to  the  colonies.  The  first  real  bank  was  an 
institution  organized  by  the  citizens  of  Penn- 
sylvania to  supply  the  patriot  army  with  rations. 
Its  bills  were  not  more  than  promissory  notes, 
signed  and  warranted  by  the  bank's  founders. 
These  were  supposed  to  be  guaranteed  by  govern- 
ment bills  on  American  citizens  abroad  for  $750,- 
000.  It  is  doubtful,  however,  if  they  could  have 
been  negotiated.   The  attempt  was  not  made. 

In  1781,  Congress  authorized  William  Morris  to 
organize  the  Bank  of  North  America  at  Phila- 
delphia. It  took  over  the  business  of  the  Bank 
of  Pennsylvania.  There  was  so  much  doubt  as 
to  the  right  of  Congress  to  carry  on  a  banking 
business  that  the  institution  was  incorporated 


14  PRACTICAL  BANKING 

under  the  laws  of  Pennsylvania,  and  so  continued 
until  1863,  when  it  became  a  national  banking 
association. 

In  the  year  1791  the  Bank  of  the  United  States, 
with  a  capital  of  $10,000,000,  was  chartered 
by  Congress.^  The  United  States  Government 
bought  one  fifth  of  the  stock.  Notwithstanding  its 
government  patronage,  a  number  of  state  banks 
sprang  up.  But  by  its  superior  capital  and  several 
branches,  the  Bank  of  the  United  States  domi- 
nated the  finances  of  the  country.  It  refused  de- 
posits of  notes  of  banks  which  it  considered  un- 
sound, and  thus  tended  to  keep  down  "wild  cats." 

In  1811  the  charter  expired  and  no  vigorous 
effort  was  made  to  renew  it.  In  1816,  however,  it 
was  renewed  with  a  capital  of  $35,000,000,  of 
which  the  Government  took  $7,000,000.  Presi- 
dent Jackson,  by  his  veto  of  the  second  renewal 
charter  in  1832,  practically  crushed  the  bank. 

From  that  time  state  banks  sprang  up  with  great 
rapidity,  so  that  in  1837  there  were  634  of  them 
with  a  capital  of  $291,000,000,  of  which  $149,000,- 
000  was  in  circulating  notes  and  $127,000,000  in 
deposits.  Loans  and  discounts  amounted  to  $525,- 
000,000.  The  enormous  crop  of  cotton  in  1836 
and  the  subsequent  fall  of  prices  came  as  a  begin- 
ning of  the  inevitable  crash.  In  1837  there  was 
suspension  of  cash  payments.  By  strict  laws  of 
Congress  and  the  state  legislatures,  the  country 
nearly  recovered  by  1844. ^ 

^  It  was  decided  in  the  famous  case  of  McCulIough  vs.  Maryland 
that  the  Federal  Government  could  operate  a  bank. 

2  Mr.  Conant  gives  a  lucid  account  of  this  in  A  History  of  Modern 
Banks  of  Issue. 


WHAT  IS  A  BANK?  15 

The  panic  of  1837  was  the  deathblow  to  the 
United  States  Bank.  After  President  Jackson's 
action,  it  had  operated  for  a  time  under  the  laws 
of  Pennsylvania.  Following  the  downfall  of  the 
central  bank,  the  United  States  adopted  the  in- 
dependent treasury  system.  The  New  York  safety 
fund  plan,  upon  which  our  contemporary  bank- 
ing methods  in  this  country  are  based,  was  worked 
out  between  1837  and  1844.  In  1864,  to  create  a 
market  for  its  bonds,  the  United  States  Govern- 
ment passed  an  act  providing  for  the  national 
bank,  which  was  to  be  a  bank  of  issue.  The  field 
was  cleared  of  state  banks  of  issue,  as  competi- 
tors, by  a  prohibitive  tax  on  their  circulation. 

With  some  alterations,  the  banks  thus  author- 
ized are  the  national  banks  of  to-day.  With  regard 
to  state  banks,  it  is  hard  to  find  general  terms  to 
describe  them,  since  every  State  has  its  own 
peculiar  banking  laws.  They  have  grown  at  an 
amazing  rate,  notwithstanding  governmental 
favor  toward  the  national  bank,  until  there  are 
to-day  upward  of  ten  thousand  of  them  in  the 
country.  In  general,  the  state  banks  are  regulated 
very  much  like  the  national  banks,  and  exercise 
practically  the  same  functions,  except  in  the  mat- 
ter of  issuing  circulating  notes  and  acting  as  regu- 
larly designated  federal  depositories.! 

II 

Fundamentally  and  largely,  the  business  of  the 
bank  is  an  exchange  of  credit.  Mr.  Frank  A. 
Vanderlip,  in  his  Columbia  University  lecture  on 

^  See  Digest  of  State  Banking  Statutes,  by  Samuel  A.  Welldon, 
National  Monetary  Commission  Series. 


16  PRACTICAL  BANKING 

the  "Modern  Bank,"  says:  "The  business  of  a 
bank  is  not  in  the  main  the  reception  of  money 
and  its  safe-keeping,  nor  is  it  the  lending  of 
money.  The  money  transactions  of  a  bank  are, 
under  ordinary  conditions,  comparatively  insig- 
nificant; almost  its  entire  business  consists  of 
receiving,  from  its  customers,  their  evidences  of 
indebtedness,  which  have  a  narrow  currency,  and 
giving  to  these  customers  in  exchange  the  bank's 
evidences  of  indebtedness,  which  have  a  wide 
currency.  These  evidences  of  a  bank's  indebted- 
ness are  then  transferred  from  one  individual  to 
another  and  from  one  bank  to  another.  And  in 
that  way,  the  credits  created  serve  the  purpose  of 
the  medium  of  exchange,  by  wliich  perhaps  ninety- 
five  per  cent  of  the  exchange  transactions  of  com- 
merce take  place." 

Then  follow  these  sentences,  which  will  throw 
rather  a  new  light  on  the  matter  for  most  people: 
"It  is  a  misconception  to  suppose  that  a  bank 
first  accumulates  deposits  and  then  loans  them 
out  to  borrowers.  The  operation  is  the  reverse. 
The  bank  first  makes  a  loan  to  the  borrower, 
and  in  so  doing  creates  a  deposit.  The  borrower 
exchanges  his  evidence  of  indebtedness  for  the 
bank's  credit,  a  deposit  balance.  The  creation  of 
these  credits  has  relation  to  production;  their 
liquidation  is  related  to  consumption.  If  produc- 
tion increases,  the  demand  for  this  exchange  of 
individual  credit  for  bank  credit  increases;  and 
the  indebtedness  incurred  is  liquidated  as  the  ar- 
ticles upon  which  the  financial  credit  was  based 
enter  into  consumption." 

This,  then,  puts  an  aspect  on  the  matter  which 


WHAT  IS  A  BANK?  17 

many  have  not  thought  of.  Doubtless  a  large 
percentage  of  bank  customers,  without  any  partic- 
ular reflection,  imagine  their  deposits  represented, 
as  in  the  old  Bank  of  Amsterdam,  by  huge  bags 
and  trays  of  money  stowed  away  in  the  vaults. 

How  a  bank  makes  its  money  without  lending 
is  a  question  which  may  not  enter  these  people's 
minds.  They  have  an  idea  that,  in  some  mysteri- 
ous way,  all  will  go  well  with  the  bank,  that  from 
unknown  sources  it  will  be  miraculously  supplied 
with  funds  from  which  to  extend  loans.  They 
even  conceive  that  a  bank  lends  them  actual 
money,  simply  because  it  offers  its  credit  and 
promises  to  redeem  in  cash,  if  demanded,  any 
drafts  against  this  credit.  As  a  matter  of  fact, 
very  few  loans  are  made  in  cash.  This  holds  true 
among  the  larger  banks  in  a  greater  degree  than 
among  the  smaller. 

Just  so,  it  follows  that  most  deposits  are  not 
made  in  cash  money,  but  in  discounts  or  credits  of 
other  banks,  i.e.,  checks.  And  in  the  same  sense 
it  is  true  that  the  larger  the  bank,  the  nearer  it 
comes  to  depending  entirely  on  the  buying  of 
paper  and  extending  of  loans  for  creating  deposits, 
or,  in  other  words,  the  "exchanging  of  the  custom- 
er's credit  with  a  narrow  currency  for  the  bank's 
with  a  wide  currency." 

It  must  not  be  misunderstood  that  small  banks 
do  not  receive  a  large  block  of  their  deposits  from 
cash  sources,  for  they  do;  but  averaging  the 
deposits  of  the  banks  of  the  country,  it  will  be 
found  that  probably  far  over  fifty  per  cent  of  the 
deposits  consists  of  those  created  by  extension  of 
credit. 


18  PRACTICAL  BANKING 

Now,  expanding  somewhat  Mr.  Vanderlip's 
last  statement,  we  may  see  directly  how  the  crea- 
tion of  credits  relates  to  production,  and  liquida- 
tion of  debts  relates  to  consumption.  Take  a 
merchant  who  wants  to  buy  a  supply,  say,  of 
cotton  or  woolen  goods.  It  may,  for  many  reasons, 
be  inconvenient  for  him  to  pay  cash  for  them  out 
of  his  assets  —  in  fact,  he  probably  keeps  most  of 
his  cash  working;  or  he  may  venture  somewhat 
beyond  his  present  assets,  in  which  there  is  surely 
nothing  illegitimate,  for  only  thus  is  business 
progress  made. 

So  he  goes  to  his  bank,  with  which  he  probably 
has  an  arrangement  for  credit,  and  exchanges  his 
note,  or  discounts  obligations  of  others  in  his 
favor,  for  a  credit  on  the  bank  ledger. 

It  should  be  parenthetically  observed  here  that 
banks  do  not  ordinarily  tie  up  their  credit  in  per- 
manent or  long-time  investments,  as  they  must 
arrange  the  maturity  of  paper  so  that  there  is  a 
continual  stream  of  repayment. 

Now  the  bank's  credit  to  the  merchant  has 
made  it  possible  for  the  manufacturer  to  produce 
the  goods.  It  might  have  been  simpler  to  have 
taken  the  case  of  the  manufacturer  in  the  first 
instance,  but  the  merchant  was  chosen  to  show 
that  it  works  back  to  the  production  in  any  event. 
Under  normal  conditions,  the  merchant  disposes 
of  his  purchases  in  due  time,  and,  with  the  pro- 
ceeds, is  enabled  to  liquidate  his  indebtedness  at 
its  maturity.  Thus  is  production  directly  related 
to  the  extension  of  credit,  and  consumption  to  the 
liquidation  of  debt. 


WHAT  IS  A  BANK?  19 


III 


After  what  has  been  said,  it  must  be  plain  that 
a  bank  cannot  hold  cash  against  the  total  of  its 
deposits,  since  so  many  of  its  deposits  are  created 
by  the  extension  of  a  credit  on  its  books,  in  which 
transaction  no  cash  enters.  And  if  it  only  received 
cash  deposits,  for  which  it  actually  held  cash  in 
reserve,  it  could  only  lend  out  its  capital  stock; 
in  which  case  where  would  be  the  necessity  of 
depositors  at  all? 

As  a  matter  of  fact,  a  certain  volume  of  cash  is 
held  in  reserve  against  all  probable  demands;  for 
extraordinary  demands  the  bank  depends  on  its 
ability  to  call  in  loans  and  obtain  cash  from  other 
banks.  All  national  banks  and  most  state  banks 
are  required  to  carry  a  certain  amount  of  cash 
reserve. 

Cities  and  towns  in  the  United  States  under  the 
National  Banking  Act,  are  divided  into  three 
classes,  as  regards  national  banking  reserves: 
(1)  central  reserve  cities;  (2)  reserve  cities;  (3) 
those  cities  and  towns  not  included  under  the 
two  previous  heads.  There  are  three  central  re- 
serve cities  —  New  York,  Chicago,  and  St.  Louis 
—  in  which,  by  United  States  statute,  national 
banks  must  keep  an  amount  of  cash  reserve  in 
their  vaults  equal  to  twenty-five  per  cent  of  their 
deposits,  not  including  deposits  of  public  money, 
i.e.,  federal  deposits.  Banks  in  these  cities  may  be 
used  as  depositories  of  a  certain  part  of  the  reserve 
of  other  banks.  Banks  in  forty-seven  reserve  cities 
must  keep  a  reserve  of  twenty-five  per  cent  of  their 
deposits,  but  one  half  of  it  may  consist  of  deposit 


20  PRACTICAL  BANKING 

balances  in  central  reserve  cities.  All  other  na- 
tional banks  need  carry  a  reserve  of  only  fifteen 
per  cent,  of  which  two  fifths  must  be  carried  in 
their  vaults,  while  three  fifths  may  consist  of  de- 
posit balances  in  either  central  reserve  or  reserve 
cities.  A  national  bank's  reserve  has  to  consist 
of  gold  or  silver,  or  its  equivalent.^ 

From  this  it  may  be  seen  that  banks  could  not 
redeem  all  their  deposits  in  cash  on  demand  if 
there  should  be  a  sudden  demand  for  all  at  one 
time.  This  reflects  not  at  all  on  the  institutions, 
for  every  customer  is  in  just  the  same  position, 
else  he  would  not  borrow.  If  every  bank  should 
demand  immediate  payment  of  all  its  credits, 
how  many  customers  could  comply.?  Since  few 
could,  the  matter  of  demand  of  payment  should 
be  cooperative.  The  customer  should  be  as  fair 
with  the  bank  as  he  expects  the  bank  to  be  with 
him.  Too  many  people  cannot  understand  why 
perfectly  solvent  banks  are  sometimes  tempora- 
rily embarrassed.  This  lack  of  consideration  is 
one  of  the  chief  reasons.  Many  a  good  bank  goes 
down  undeservedly  because  of  this  lack  of  cooper- 
ation. 

Banks  conduct  their  business  —  and  this  is 
surely  a  matter  of  common  knowledge  —  solely 
for  lucrative  results.  They  are  not  philanthropic 
institutions.  They  are  selfish  and  make  profits  as 
large  as  possible.  Therefore,  it  is  perfectly  reason- 
able to  believe  that  they  will  lend  as  much  as 
possible,  still  retaining  a  safe  margin  for  demands. 

It  is  not  the  purpose  of  this  book,  however,  to 

*  Since  reserve  requirements  will  be  readjusted  under  the  Federal 
Reserve  Act,  it  will  be  well  to  refer  to  chap,  xx  for  this  information. 


WHAT  IS  A  BANK?  21 

disparage  the  value  of  a  required  reserve.  It  is 
one  of  the  most  salutary  provisions  of  our  banking 
system.  It  prevents  dangerous  inflation,  which 
would  most  certainly  take  place  unless  there 
were  this  necessary  check.  It  is  by  no  means 
advised  that  every  bank  customer  should  trust 
his  banker  blindly,  or  even  trust  him  at  all.  But 
the  banker  ought  to  be  shown  every  reasonable 
consideration  which  one  business  man  looks  for 
from  another. 

To  round  off  this  discussion  of  the  reserve,  and 

to  give  an  idea  of  the  comparatively  little  cash 

in  the  country,  a  few  figures  are  appended.    It 

simply  goes  to  prove  our  earlier  remarks  in  regard 

the  to  the  most  of  our  business,  which  is  conducted 

that  iJong  lines  of  credit.  Cash,  after  all,  has  the  same 

At  thfc'ity  in  business  that  it  has  in  the  clearing  house 

announcecin  foreign  exchange.     It  merely  represents 

c^^g^^te^jjjlifference  between  debits  and  credits. 

presume  tte  figures  show  the  amount  of  cash  money  in 

now     after ,    . 

Germany  aiuitcd  States  on  January  3,  1910:  — 

territory    t' 

KeliCid   coin,    including    bullion    in    the 

The  Sh  Treasury.     Of  this  about  one    half 

demned    ^g^g  jjj  j-j^g  Treasury  to  secure  gold 

K^TGse      certificates $1,638,108,821 

Stat"     Standard  silver  dollars.    Of  this  four 

fifths  was  to  secure  silver  certificates. . .       564,334,719 

Subsidiary  silver 162,801 ,137 

Treasury  notes  of  1890 3,942,000 

United  States  notes 340,681,016 

National  bank  notes 710,354,253 

Total .$3,426,221,946 

This  total  was  just  $2,380,102  less  than  on 
December  1,  1909,  or  about  thirty  days  previous. 


22  PRACTICAL  BANKING 

However,  January  3,  1910,  shows  $6,797,402  less 
in  gold  than  on  December  3, 1909.  This  was  prob- 
ably caused  by  the  redemption  of  many  gold 
certificates  with  gold  bars  and  coin.  About  this 
time,  Americans  had  to  pay  an  immense  lump  of 
dividends  on  their  securities  held  by  foreigners. 
If  the  exchange  market  was  short,  as  it  usually  is 
at  this  time  of  the  year,  it  was  necessary  to  export 
gold  to  pay  our  debts.  Therefore,  a  major  portion 
of  the  difference  in  gold  for  the  two  dates  was 
probably  exported  coin  and  bullion.  But  six  and 
three  quarter  millions  is  not  a  great  sum  for  pay- 
ing our  obligations  at  dividend  time,  when  we 
read  on  April  25,  1910,  that  five  New  York  banks 
in  one  day  engaged  to  ship  over  the  ocean  $12,- 
500,000.  The  truth  is,  the  six  and  three  quarter 
millions  was  merely  the  difference  between  our 
available  credits  and  what  we  owed  abroad. 

The  silver  and  national  bank  note  accounts 
gained  January  3, 1910,  $4,457,800,  or  just  enough 
to  offset  the  loss  in  gold,  a  slight  decrease  in 
treasury  notes  of  1890,  and  leave  the  total  slump 
of  $2,380,102. 

The  amount  of  money  in  circulation  of  January 
3,  1910,  was  $3,122,154,538,  as  against  $3,092,- 
315,703  for  January  2,  1909,  as  against  $816,266,- 
721  on  January  1,  1879.  The  amount  of  money 
held  in  the  Treasury  as  cash  assets  of  the  Govern- 
ment on  January  3, 1910,  amounted  to  $304,067,- 
408.  This  did  not  include,  however,  government 
deposits  in  national  banks  amounting  to  $35,- 
324,066.85. 


WHAT   IS   A   BANK?  23 


IV 

Since  the  lending  of  credits  is  so  important  a 
part  of  the  bank's  business,  it  is  well  to  give  a 
little  time  to  an  explanation  of  the  principal 
methods  of  extending  credit,  namely,  commercial 
paper  and  secured  paper.  With  regard  to  ma- 
turity there  are  two  divisions,  —  time  and  de- 
mand loans. 

Probably  two  thirds  of  the  credit  extended  in 
the  United  States,  by  and  large,  consists  of  com- 
mercial paper.  This  is  simply  the  promise  of  an 
individual,  group  of  individuals,  or  corporation  to 
pay  a  certain  sum  either  on  demand  or  at  some 
definite  time.  This  paper  is  made  in  settlement  of, 
or  to  provide  funds  for,  some  commercial  trans- 
action, hence  the  name  "commercial."  A  note  for 
a  stock  of  dry  goods  or  for  a  car  of  wheat  would 
be  a  piece  of  commercial  paper.  Although  it  is 
true  that  a  large  part  of  this  paper  is  given  with- 
out collateral  security,  this  should  not  be  taken 
as  a  primary  distinction.  The  real  distinction 
between  commercial  paper  *  and  ordinary  loans  is 
that  the  former  is  considered  a  piece  of  merchan- 
dise,^ so  rendered  by  the  fact  that  it  liquidates 
itself,  while  the  latter  consist(l)  of  "receivables" 
taken  in  the  ordinary  course  of  business  for  debts, 
and  (2)  of  loans  based  on  collateral. 

^  Just  what  will  constitute  "  commercial  paper"  under  the  Fed- 
eral Reserve  Act  is  in  doubt.  (See  chap,  xx.)  But  genuine  com- 
mercial paper  should  be  self-liquidating,  that  is,  represent  trans- 
actions which  will  before  maturity  of  the  note  put  sufficient  cash 
in  the  obligee's  hands  to  pay  it. 

^  Hence,  one  occasionally  hears  it  called  "mercantile"  paper  in 
some  banks. 


24  PRACTICAL  BANKING 

A  secured  paper  is  a  note  whose  payment  is 
guaranteed  by  collateral,  such  as  stocks,  bonds, 
notes,  and,  in  some  cases,  mortgages  on  real 
estate.  It  would  be  safe  to  say  that  in  this  class 
of  loans,  the  banker  depends  less  on  the  signer 
than  on  the  collateral.  But  this  is  natural,  for 
such  loans  are  the  more  important  ones,  so  far  as 
individual  amounts  are  concerned,  and  individual 
and  personal  promises  are  not  usually  considered 
acceptable.  The  larger  the  city  and  the  larger  the 
bank,  the  more  impersonal  become  these  trans- 
actions. The  amount  loaned  on  collateral  varies 
as  the  reputation  of  the  security.  It  is  customary 
to  demand  collateral  at  least  twenty  per  cent  in 
excess  of  the  amount  of  the  loan.  Sometimes,  as 
in  the  case  of  real  estate,  more  excess  is  required, 
while  at  other  times,  in  such  cases  as  United 
States  gold,  interest-bearing  bonds,  less  excess  or 
none  at  all  is  required. 

Under  the  new  Federal  Reserve  Act,  national 
banks,  hitherto  denied  the  privilege,  may  make 
loans  on  farm  lands,  provided  the  lending  banks 
are  not  located  in  central  reserve  cities.  Generally 
speaking,  however,  loans  on  real  estate  are  con- 
fined to  savings  banks  and  trust  companies. 

It  is  imperative,  as  we  have  seen,  that  the 
banker  so  arrange  his  paper  that  it  is  constantly 
maturing.  To  be  sure,  the  credits  are  immediately 
reloaned,  but  for  the  sake  of  good  banking,  repay- 
ments must  be  so  pouring  in  that,  in  case  of  an 
unexpected  heavy  demand,  within  a  few  days  the 
bank  could  gather  enough,  together  with  its  call 
loans,  to  meet  the  emergency.  So  it  is  not  custom- 
ary to  make  long  investments,  beyond  a  certain 
small  percentage. 


WHAT   IS   A   BANK?  25 

The  call  loan  of  New  York  is  distinct  from  that 
of  other  parts  of  the  country  and  yet  it  probably 
illustrates  the  principle  of  call  or  demand  loans 
better  than  any  other.  The  New  York  call  loan 
represents  a  sum  loaned  out,  usually  on  the  secur- 
ity of  stocks  or  bonds.  It  may  be  demanded  at 
any  time  by  the  lender  or  paid  at  any  time  by 
the  borrower.  There  is,  however,  a  long-observed 
custom  of  neither  demanding  nor  tendering  pay- 
ment after  one  o'clock  of  a  business  day. 

When  there  is  a  financial  stringency,  it  will  be 
observed  that  the  great  bankers  take  more  call 
loans  than  usual,  though  it  be  at  a  lower  rate. 
They  prefer  to  have  the  option  of  immediate  col- 
lection in  case  of  emergency.  So  the  prices  charged 
for  call  money  vary  from  day  to  day  as  there  is 
greater  or  less  demand  than  supply. 

Many  firms  take  advantage  of  the  call  money 
market  for  a  part  of  their  borrowing.  For  in- 
stance, they  carry  one  third  to  one  half  of  their 
line  of  credit  in  time  loans,  and  depend  on  favor- 
able chances  on  the  call  market  for  the  balance, 
as  it  is  needed. 

Call  loans  are  made  in  two  ways:  first,  in  pri- 
vate, that  is,  at  the  lending  bank;  and  second,  at 
the  "money  post"  on  the  Stock  Exchange. 

Of  the  first,  there  is  nothing  to  remark  beyond 
the  fact  that  the  prospective  borrower  with  his 
security  makes  a  loan  from  the  bank  ofifering  the 
best  inducements. 

The  "  money  post "  on  the  Stock  Exchange  floor 
is  the  place  where  the  representatives  of  the  banks 
and  the  brokers  meet  at  eleven  o'clock  each  busi- 
ness day.  Banks  have  at  that  time  heard  from  the 


26  PRACTICAL  BANKING 

clearing  and  have  calculated  whether  they  can 
lend  or  must  call  in.  On  the  other  hand,  the  brok- 
ers probably  know  whether  they  have  a  surplus 
or  need  to  borrow.  In  about  an  hour  the  transac- 
tions are  largely  over.  However,  around  two 
o'clock  there  is  a  little  bustle,  as  unexpected 
money  may  have  come  in  or  unexpected  demands 
have  been  made. 

Lending  money  and  issuing  circulating  notes, 
then,  in  a  very  concrete  and  tangible  way,  are  the 
important  functions  of  the  bank.  These,  indeed, 
are  the  two  functions  —  and  of  the  two,  lending 
is  the  greater  —  upon  which  the  entire  banking 
theory  rests.  The  other  functions  are  merely 
incidental.  As  Mr.  Vanderlip  has  shown,  banks 
do  not  go  out  and  gather  in  deposits  in  order  to 
lend;  but  they  make  a  loan,  by  which  process 
they  create  a  deposit.  Of  course,  this  could  not 
apply  to  the  odds  and  ends  of  loans,  where  a 
person  is  paid  in  cash  for  the  proceeds  of  his  paper, 
but  it  is  a  general  rule  for  the  making  of  loans 
and  amassing  of  deposits.  Deposits  are  not  a 
bank's  desideratum.  They  are  but  an  incident, 
a  necessary  incident,  however,  to  the  end  of  lend- 
ing more  money  than  the  capital  stock. 

Looking  back  over  the  centuries  which  have 
elapsed  since  the  uncouth  savage  bartered  a 
wild  boar's  hide  for  a  robust  female  to  cheer  his 
hut;  following  the  ever-ameliorating  attempts  at 
banking  among  the  Greeks  and  Romans;  among 
the  Florentines,  who  were  so  honest  —  it  is  said  — 
that  a  ruined  banker's  bench  was  broken;  among 
the  ever-confiding  but  wrathful  Dutch  who  were 
swindled  by  the  Bank  of  Amsterdam;  among  the 


WHAT   IS   A   BANK?  27 

suspicious  Englishmen,  one  of  whom  thought  the 
new-fashioned  bankers  preposterous,  though  he 
consented  to  become  one  himself,  —  up  to  the 
present  day  with  its  fine  science  of  finance,  we  are 
constrained  to  feel  proud  of  the  race  for  this 
achievement  alone.  To-day  our  banks  unite  the 
aesthetic  with  the  practical.  Great  marble  build- 
ings, showing  the  result  of  centuries  of  architec- 
tural progress,  are  the  homes  of  great  financial 
institutions,  reflecting  the  outcome  of  centuries 
of  advance  toward  an*ideal  for  facilitating  busi- 
ness and  making  comfort  and  happiness  more  the 
province  of  all.  And  to-day's  accomplishments 
are  but  prophetic  fingers  pointing  to  a  greater 
and  a  better  future. 


CHAPTER  II 

THE  STOCKHOLDERS  AND  THE  BOARD  OF 
DIRECTORS 

As  we  now  turn  from  the  foregoing  brief 
account  of  the  beginning  of  banking  and  a  few  of 
its  intricate  details  to  a  ghmpse  into  the  different 
departments,  as  they  are  every  day,  it  will  be 
pleasant  to  fancy  ourself^es  visiting  personally 
the  several  officers  and  employees.  With  true, 
financial  suavity  they  will  receive  us  and  take 
great  pleasure  in  explaining  the  mechanics  of  their 
system.  It  is  even  possible  that  occasionally  they 
may  take  us  into  their  confidence  and  relate  one  or 
two  "  inside  "  secrets.  But  we  must  not  expect  too 
much  of  this,  for,  after  all,  we  are  on  a  tour  of  in- 
spection of  the  machinery  of  banking,  and  shall 
not  attempt  to  expose  the  results  of  unscrupulous 
men's  tampering  with  the  public  trust. 

Why  do  men  organize  a  bank.^^  First,  to  increase 
the  facilities  for  handling  a  huge  credit  business, 
such  as  ours,  and  to  improve  the  service  by  a 
wholesome  competition.  Second,  to  make  money, 
to  use  their  capital  in  a  fashion  that  will  make  it 
"spin  out"  the  farthest.  Both  these,  after  all, 
resolve  themselves  simply  into  the  American 
magic  passwords,  "Make  money."  So  we  may 
look  upon  the  bank  as  a  selfish,  not  a  benevolent, 
institution.  And  oftentimes,  alas,  it  is  a  clever 
means  of  exploiting  other  people's  money.  But  let 
us  consider  it  here  as  a  square,  honest  organiza- 
tion, formed  with  some  idea  of  cooperation. 


STOCKHOLDERS  AND   DIRECTORS      29 

When  a  group  of  men  set  about  to  organize  a 
bank,  capital  stock  is  one  of  the  first  considera- 
tions. The  amount  of  capital  is  decided  upon,  and 
a  certain  block  of  it  is  put  on  the  market  for  pur- 
chase by  the  public.  This  may  be  because  they 
are  not  able  to  subscribe  it  all  themselves  or  — 
which  is  more  probable  —  it  may  be  because  of 
the  desire  to  popularize  the  new  company.  Thus 
a  portion  of  the  capital  stock  becomes  the  prop- 
erty of  a  scattered  number  of  people.  This  is  one 
means  of  exploiting  other  people's  money,  for 
their  scattered  and  unorganized  voice  is  of  little 
avail,  even  if  combined  they  own  more  than  one 
half  of  the  stock.  Those  who  subscribe  stock  in 
the  bank  pay  either  in  cash  or  on  short  time. 
Under  most  banking  laws,  they  may  not  exercise 
the  functions  of  stockholders  until  they  have  paid 
for  their  shares.  Almost  the  only  features  of  the 
business  in  which  they  actively  participate  are 
the  election  of  directors  and  the  reception  of  divi- 
dends. The  first  is  a  duty;  the  second,  a  sweet 
and  pleasing  reward  of  duty  well  performed. 

Shareholders  may  authorize  the  change  of 
name  or  location  of  their  associations,  but  this  is 
of  little  general  importance,  since  the  occasion 
for  its  exercise  rarely  arises.  They  also  have  the 
power  of  allowing  the  reduction  or  increase  of 
capital  stock.  They  are  liable  for  all  of  the  debts 
of  the  bank,  but  usually  only  in  the  proportion 
which  their  stock  bears  to  the  total  capital. 

Ordinarily,  the  meeting  of  the  stockholders  for 
the  election  of  directors  takes  place  once  per  an- 
num. This  meeting  is  announced  generally  in 
several  newspapers,  and  notices  of  it  are  mailed  to 


30  PRACTICAL  BANKING 

each  qualified  participant.  The  meetings  are 
called  at  some  definite  time,  provided  for  by  law 
or  by  the  rules  of  the  association.  A  majority  of 
the  stock  is  required,  either  by  the  presence  of  its 
owner  or  by  proxy,  to  elect.  After  the  directors 
are  chosen,  the  responsibility  of  the  stockholders 
is  removed  and  they  resume  their  ordinary  voca- 
tions with  an  eye  on  the  dividend  month,  hoping 
to  reap  the  fruit  of  their  wisdom  in  an  abundant 
income  from  their  stock.  But  we  may  assume  that 
the  scattered  holdings  of  stock  have  little  voice 
in  these  elections;  in  fact,  rarely  attend. 

It  may  be  noted  here  that,  in  a  great  number  of 
instances,  a  comparatively  small  coterie  of  men 
own  a  majority  of  stock;  and  these  men  will,  of 
course,  constitute  the  board  of  directors.  The 
bank  is  a  corporation,  —  one  owned  by  a  large 
number  of  people,  but  actually  controlled  by  a 
few  shareholders,  who  possess  perhaps  more  than 
fifty  per  cent  of  the  stock.  However,  it  is  demo- 
cratic to  have  the  stock  distributed  among  many 
people;  it  advertises  and  popularizes  the  associa- 
tion. 

In  the  case  of  a  newly  organized  bank,  the  first 
oflBcial  act  of  the  board  of  directors,  after  taking 
the  oath  of  office  and  selecting  a  chairman,  is  to 
draw  up  a  set  of  by-laws  and  regulations  to  govern 
their  own  procedure  and  the  conduct  of  the  bank. 
This  is  often  enough  submitted  to  the  stockholders 
for  ratification.  As  soon  as  possible  must  come  the 
selection  of  officers  for  the  bank,  —  the  board's 
personal  representatives.  These  officers  are  a 
president,  a  cashier,  and  whatever  others  it  may 
be  necessary  to  have. 


STOCKHOLDERS  AND  DIRECTORS      31 

The  general  policy  of  the  bank  is  in  the  keeping 
of  the  directors.  They  meet  every  so  often,  and  as 
they  command,  the  oflBcers  must  do.  Of  course, 
it  would  be  impracticable  for  the  entire  board  to 
try  to  manage  the  details  of  the  association.  In 
this  business,  as  in  every  other,  the  executive 
power  over  affairs  of  everyday  routine  should  be 
single,  not  multiform. 

Yet  there  is  a  great  variation  in  the  degree  of 
supervision  which  the  directors  assume.  In  some 
banks  they  meet  as  often  as  three  or  four  times  a 
week,  consider  every  application  for  credit,  and 
work  out  in  detail  plans  for  the  conduct  of  the 
business.  In  others,  they  are  not  nearly  so  active 
and  trust  a  great  deal  more  to  the  business  ability 
and  integrity  of  their  president.  In  general,  the 
distinction  between  the  former  class  and  the  latter 
is  the  distinction  between  a  large  and  a  small 
bank. 

However,  couched  in  general  terms,  the  duties 
of  the  board  are  largely  "legislative,  appointive, 
supervisory,  or  advisory."  The  frequency  of  its 
meetings  varies  greatly  in  different  banks.  One 
meeting  a  year,  or  two,  at  which  dividends  are 
declared,  officers  elected,  and  the  past  year's  prog- 
ress reviewed,  is  considered  sufficient  in  some 
institutions;  in  others,  as  already  said,  a  meeting 
occurs  several  times  weekly.  The  larger  the  asso- 
ciation, as  is  evident,  the  more  necessary  are  these 
meetings.  But  it  has  been  the  practice  of  the 
Comptroller  of  the  Currency  to  try  to  make 
directors  really  direct,  that  is,  meet  regularly  and 
as  often  as  necessary.  For  their  attendance  the 
directors  are  paid  from  $2.50  to  $20  per  meeting. 


32  PRACTICAL  BANKING 

In  order  to  insure  prompt  attendance,  some  cor- 
porations place  the  fees  on  the  table  before  each 
director's  place;  five  minutes  after  the  meeting  is 
called  to  order,  those  who  are  present  divide  the 
absentee  directors'  fees  among  themselves.  This 
plan  has  been  found  to  have  a  marvelous  effect 
in  insuring  prompt  attendance  on  the  part  of 
directors. 

By  reason  of  the  trust  reposed  in  him,  every 
director's  duty  demands  that  he  be  absolutely 
conscientious  and  that  he  always  act  in  a  manner 
best  calculated  to  meet  the  needs  of  the  bank  as  a 
whole. 

The  board  of  directors  is  the  source  of  all  mo- 
tive power  in  the  bank's  operation.  Upon  the 
directors,  finally,  depends  whether  it  will  succeed 
or  fail.  How  important  that  they  be  men  of  in- 
tegrity and  honor  !  As  a  rule,  the  directors  of  a 
bank  are  men  of  unquestioned  ability.  If  we  were 
to  run  through  the  names  of  the  board  of  some 
huge  New  York  institution,  for  instance,  we  should 
probably  find  railroad  magnates,  mine  operators, 
professional  men  of  note,  and  wizards  of  many 
branches  of  commerce  and  trade.  When  they  se- 
lect the  officers  of  the  bank,  the  directors  employ 
their  best  judgment.  The  attitude,  ability,  and 
general  experience  of  the  president  and  cashier 
will  count  for  nearly  everything  in  the  earning 
of  profits.  Likewise  their  honesty  and  trustworthi- 
ness in  carrying  out  orders,  their  fidelity  to  duty, 
and  their  high  reputation  for  reliability  will  be 
items  of  vast  importance. 

Since  the  bank  must  exist  and  subsist  on  pub- 
lic patronage,  it  is  not  hard  to  discover  that  an 


STOCKHOLDERS  AND  DIRECTORS     33 

officer  should  either  be  a  man  already  popular  or 
one  hkely  to  become  popular.  Other  things  being 
equal,  a  prominent  man  is  preferable.  Sometimes 
a  very  prominent  man,  who  cannot  act,  allows  his 
name  to  be  used  as  president  for  the  prestige  it 
gives  his  bank.  Now,  as  has  been  already  seen, 
the  power  granted  the  president  depends  largely 
on  local  conditions  and  the  attitude  of  the  direc- 
torate. Usually,  however,  the  president  will  be 
the  instrument  of  the  board.  He  will  have  much 
power  and  much  will  be  left  to  his  discretion,  but 
the  board  will  hedge  him  in  by  its  resolutions. 

In  selecting  a  cashier,  practically  the  same 
requisites  are  asked  for.  He  must  be  a  man  of 
executive  talent  and  one  with  practical  and  eco- 
nomical views.  Also  he  ought  to  be  willing  to 
subordinate  his  ideas  to  those  of  the  president. 
This  insures  frictionless  running  for  the  bank. 

Directors  are  supposed  to  keep  vigilant  eyes 
on  the  officers  for  the  protection  of  stockholders 
and  depositors.  This  vigilance  extends  to  actual 
auditing,  in  large  banks,  at  least.  The  writer 
knows  of  many  banks,  for  instance,  where  every 
year  a  committee  of  directors  counts  all  of  the 
cash  in  the  bank  and,  approximately,  at  least, 
makes  it  balance  with  the  general  bookkeeper's 
record.  The  board  also  watches  "Liabilities  and 
Resources,"  seeing  that  resources  are  properly 
apportioned.  For  instance,  "Loans  and  Dis- 
counts" might  run  above  a  safe  figure  and  need 
reducing,  or  —  for  some  reason  —  "Reserve" 
might  be  too  low  and  need  increasing.  On  the 
other  hand,  the  executive  may  sometimes  have  to 
be  gently  prodded  for  overconservatism,  amount- 


34  PRACTICAL  BANKING 

ing  even  to  sluggishness.  Also  the  bank  may  not 
be  growing  and  expanding  as  it  should,  or  its  serv- 
ice may  not  be  satisfactory;  the  board  sets  about 
to  correct  the  defects.  This  may  extend  even  to 
displacing  officers  and  employees. 

The  directors  lend  stimulus  to  the  business. 
Their  influence  brings  desirable  patrons  and  adds 
prestige  to  the  institution.  They  give  additional 
security  to  the  depositors;  it  is  harder  to  find  ten 
dishonest  men  than  one.  Their  usefulness  con- 
sists in  the  very  diversity  of  their  vocations. 
Discussion  and  varied  experience  will  always 
evolve  better  general  working  principles  than  the 
reflections  of  a  single  mind.  They  are  the  repre- 
sentatives of  the  stockholders,  and  act  as  checks 
on  the  conduct  and  manipulations  of  the  oflBicers. 


CHAPTER  III 


THE  PRESIDENT 


The  primary  power  in  the  government  of  the 
bank  Hes,  of  course,  in  the  stockholders.  But  it 
would  be  the  height  of  absurdity  to  contemplate 
the  entire  body  of  shareholders  trying  to  manage 
the  bank  personally.  The  directorate  is  small;  it 
may  be  composed  of  only  five  men.  But  even  the 
directors  are  busy  men,  engaged  so  deeply  in  com- 
mercial or  professional  activities  that  they  could 
not  find  time  personally  to  conduct  the  bank's 
transactions.  Further,  it  is  a  very  well-believed 
doctrine  that  many  hands  in  the  personal  control 
of  an  enterprise  tend  to  disrupt  it  rather  than  to 
bind  and  cement  it. 

These  complications  are  anticipated  by  our 
national  and  state  banking  laws,  which  require 
the  election,  by  the  stockholders,  of  a  directorate, 
and  by  it,  of  a  suitable  number  of  ofiicers.  The 
directors  have  general  control  of  the  policy  of 
the  bank,  while  the  officers  personally  carry  out 
these  policies  and  work  out  the  details.  However, 
it  must  be  understood  that  the  subordinate  officers 
are  under  the  direct  command  of  the  president, 
who  is  chief  executive  and  plans  the  large  features 
of  the  bank's  work. 

The  president  is,  then,  the  personal  representa- 
tive and,  after  a  fashion,  the  mouthpiece  of  tlie 
directorate,  primarily,  and  of  the  stockholders, 
indirectly. 


36  PRACTICAL  BANKING 

There  are  all  sorts  of  presidents  and  presiden- 
cies. They  are  found  in  the  range  from  the  little 
two-clerk  bank  at  the  cross-roads,  through  the 
gamut  of  town  and  city  banks,  to  the  largest 
institutions  of  the  metropolis.  It  is  natural  that 
the  duties  and  requirements  of  a  president,  the 
capital  of  whose  bank  is  $10,000,  will  differ  funda- 
mentally and  in  detail  from  those  of  the  president 
whose  bank  is  capitalized  at  $25,000,000.  In  the 
little  bank,  while  crops  are  growing  and  business 
is  dull,  the  president  is  likely  to  take  down  his 
faithful  breech-loader  and  go  out  for  a  day's  hunt. 
In  the  great  city,  he  is  constantly  at  his  desk, 
poring  over  schemes  for  making  a  little  shorter 
cut  than  a  competitor.  He  carries  his  business 
to  his  home  and  to  his  bed.  For  perhaps  a  month 
in  the  year,  he  may  steal  away  for  a  hurried  trip 
to  Europe  or  a  scurry  over  the  western  wonders 
of  our  own  land.  But  even  there,  he  is  in  constant 
communication  with  his  institution,  and  not  in- 
frequently directs  some  of  its  important  functions. 

If  the  bank  is  new,  he  organizes  the  work.  He 
has  so  many  vice-presidents,  a  cashier,  and  so 
many  assistant  cashiers  at  his  disposal  to  begin 
with.  Provision  is  also  made  for  the  employment 
of  a  suitable  number  of  clerks.  He  puts  the  cashier 
in  charge  of  the  clerical  force  generally. 

In  small  banks  the  president's  duties  include 
many  of  those  held  by  active  vice-presidents  and 
cashiers  in  larger  ones.  In  this  case  he  is  much 
nearer  the  employees  and  therefore  can  attend 
to  many  more  details  of  the  business. 

In  a  nutshell,  the  president  seems  to  be  look- 
ing out  for  the  growth  of  the  bank  along  proper 


THE  PRESIDENT  37 

and  legitimate  lines ;  seeking  to  increase  the  total 
resources;  endeavoring  to  expand  it,  making  it 
huge,  powerful,  and  rich.  His  task  is  to  make  a 
maximum  dividend  for  the  stockholders,  but  by 
legitimate  methods  always.  It  seems  that  his 
ability  to  do  this  is  incompatible  with  too  much 
devotion  to  the  details  of  the  actual  clerical  force. 
It  is  an  old-fashioned  idea,  now  almost  eliminated 
in  the  largest  institutions,  that  the  president 
should  run  every  wheel  in  the  bank  and  see  that 
each  is  properly  oiled.  Rather,  it  seems  the  better 
plan  to  have  some  capable  and  responsible  sub- 
ordinates who  can  be  trusted  to  attend  to  the 
smaller  transactions  and  to  the  routine.  This  idea 
is  prevalent  among  the  great  financial  houses  of 
the  country.  In  their  case,  the  president  simply 
cannot  devote  his  time  to  see  that  every  pass- 
book is  properly  balanced. 

In  his  effort  to  expand  the  bank  and  earn  goodly 
dividends,  the  president  meets  his  greatest  diffi- 
culty and  principal  duty  —  that  is,  in  the  grant- 
ing of  loans  to  banks,  corporations,  and  individ- 
uals. In  the  first  chapter  the  different  kinds  of 
loans  have  been  explained  in  some  detail. 

The  systems  of  extending  their  credit  are  per- 
haps the  most  individualistic  and  variant  features 
of  different  banks.  In  some,  the  directorate  is  a 
powerful  and  active  factor,  which  passes  on  every 
application  for  credit.  In  such  a  case  there  is  a 
meeting  of  the  directors  once,  twice  per  week,  or 
perhaps  daily.  The  chairman  of  the  board  becomes 
a  potent  officer.  In  other  institutions  the  direc- 
torate is  much  less  active,  contenting  itself  with 
periodic  reviews  of  the  bank's  progress,  giving 


38SG00 


88  PRACTICAL  BANKING 

general  advice  to  the  president  and  allowing  him 
the  power  of  granting  loans.  With  the  first  type 
of  association,  we  have  dealt  in  some  detail  in  the 
preceding  chapter.  We  shall  busy  ourselves  for 
the  time  being  with  the  latter  type,  i.e.,  where  the 
president  has  the  loan-granting  power. 

It  would  be  impossible,  in  a  bank  of  any  con- 
siderable size,  for  the  president  to  pass  on  every 
loan  and  discount.  A  large  number  of  these  are 
put  in  the  hands  of  vice-presidents  or  cashiers. 
However,  it  is  considered  proper  for  the  president 
to  conduct  negotiations  on  most  applications  for 
credit  from  new  customers.  Likewise,  he  feels  it 
incumbent  upon  him  personally  to  attend  to  the 
requests  of  distinguished  or  prominent  patrons. 

In  the  granting  of  loans,  especially  to  new  cus- 
tomers, the  president  or  his  assistant  must  observe 
many  precautions,  for  there  is  no  business  so  haz- 
ardous as  the  lending  of  other  people's  money. 
Since  there  is  such  hazard,  it  is  necessary  that  the 
lender  feel  amply  justified  in  making  the  loan, 
either  by  virtue  of  the  good  credit  of  the  signer 
or  indorser,  or  because  of  the  excellence  of  the 
security.  And  one  who  is  unknown  should  never 
complain  if  the  bank  demands  plenty  of  good 
security  of  him.  It  is  customary  to  require  gilt- 
edge  security  from  100  to  120  per  cent  on  $100, 
and,  of  course,  the  ratio  increases  as  the  security 
offered  is  lessened  in  value. 

Another  item!  By  reason  of  the  hazard  of 
money-lending  —  which  is  greater  than  in  most 
other  businesses  —  it  ought  not  to  be  held  against 
a  bank  that  it  charges  a  reasonable  rate  of  interest. 
This  rate  must  necessarily  differ  as  the  security 


THE  PRESIDENT  39 

and  signer  are  the  very  best  or  only  medium,  or 
as  the  discountee  may  or  may  not  do  a  large 
volume  of  business  at  the  bank.  Also  the  ratio  of 
supply  to  demand  of  credit  is  bound  to  play  an 
important  part  in  determining  the  interest  or  dis- 
count rate. 

From  A.  B.  Johnson's  treatise  on  banking,  the 
following  excellent  commentary  is  taken :  — 

A  banker  should  possess  a  sufficiency  of  legal  knowl- 
edge to  make  him  suspect  what  may  be  defects  in  prof- 
fered security,  so  as  to  submit  his  doubts  to  authorized 
counselors.  He  must,  in  all  things,  be  eminently  prac- 
tical. Every  man  can  tell  an  obviously  insufficient 
security  as  well  as  an  obviously  abundant  security; 
but  neither  of  these  constitutes  any  large  portion  of  the 
loans  that  are  offered  to  a  banker.  Security  practi- 
cally sufficient  for  the  occasion  is  all  that  a  banker  can 
obtain  of  the  greater  part  of  his  loans.  If  he  must  err 
in  his  judgment  of  securities,  he  had  better  reject  fifty 
good  loans  than  make  one  bad  debt.  But  he  must 
endeavor  not  to  err  on  the  extreme  of  caution  or  the 
extreme  of  temerity ;  and  his  tact  in  these  particulars 
will,  more  than  any  other,  constitute  the  criterion  of 
his  merits  as  a  banker. 

Of  the  credit  of  a  bank,  a  certain  part  is  in- 
vested in  very  short-time  and  demand  loans  to 
provide  for  extraordinary  demands.  Most,  how- 
ever, is  in  two,  three,  and  four  months'  paper. 
The  amount  for  longer  time  than  four  months 
will  not  exceed  a  very  small  per  centum  of  the 
whole,  for  good  banking  principles  demand  a  con- 
tinual process  of  repayment  and  relending. 

If  there  is  any  one  thing  that  distinguishes  a 
wise  president  from  a  foolish  one,  it  is  the  manner 


40  PRACTICAL  BANKING 

in  which  he  has  the  maturing  paper  collected. 
Stacks  of  past-due  and  uncollected  paper  speak 
eloquently  of  mismanagement,  of  bad  loans,  per- 
haps, but  more  frequently  of  vacillating  and  lax 
methods  of  enforcing  payment.  The  successful 
president  so  orders  things  that  there  shall  be  no 
dilly-dallying  about  pressing  collection.  In  cases 
of  aggravated  obduracy  with  regard  to  payment, 
the  paper  is  turned  over  to  an  attorney  for  suit  at 
law. 

Another  item  which  the  banker  watches  most 
carefully  is  overdrafts.  A  certain  small  percent- 
age of  overdrafts  must  and  will  creep  in.  It  is 
either  impossible  or  impolitic  to  refuse  payment 
of  some  checks,  even  though  the  account  may 
not,  at  the  time,  be  sufficient  to  cover  the  checks. 
But  the  sagacious  banker  keeps  these  as  low  as 
practicable.  An  overdraft  is  equivalent  to  a  loan 
without  interest  or  security.  Most  banks  have 
bridged  this  difficulty  by  making  a  temporary 
loan  to  cover  the  overdraft,  exacting  security 
where  it  is  feasible. 

The  president  of  a  great  bank  has  no  more  of  a 
lease  on  life  than  the  beggar,  and  although  the 
heavens  themselves  may  blaze  forth  his  death, 
yet  he  can  no  more  defer  its  inevitable  coming 
than  an  ant.  It  therefore  behooves  him  to  keep 
his  work  so  ordered  that  he  may  leave  the  bank 
each  night  as  though  it  were  his  last.  If  he  does 
not,  he  is  not  faithful  to  his  high  trust,  he  is  not 
true  to  himself  or  to  his  friends.  For  a  great 
bank,  though  it  stops  to  drop  a  tear  on  the  fallen 
chief's  grave,  cannot  swerve  from  its  course  for 
its  own  safety.  There  are  so  many  things  which. 


THE  PRESIDENT  41 

if  left  undone  overnight  and  death  should  call, 
could  not  be  adjusted  so  nicely,  if  at  all. 

The  president  represents  his  institution  before 
the  public.  Popularly,  he  is  almost  conceived  to 
be  the  hank.  He  has  many  means  of  being  useful 
besides  guarding  the  executive  duties  of  the  bank. 
His  personal  influence  and  popularity  will  be  of 
aid  in  getting  desirable  customers  for  the  bank, 
both  corporate  and  individual.  His  occasional 
visit  to  and  personal  acquaintance  with  the  larg- 
est of  the  bank's  dealers  are  of  infinite  service. 

The  president's  position  in  the  bank  may  be 
illustrated  by  a  rather  homely  simile.  He  may  be 
likened  to  one  of  the  pilots  on  the  ferry-boats 
which  cross  and  recross  the  Hudson  at  the  lower 
end  of  New  York  City.  Through  the  swirling 
water,  keeping  a  sharp  lookout  for  craft  of  every 
description,  blowing  the  hoarse  whistle  occasion- 
ally to  warn  some  little  tug,  the  pilot  guides  his 
heavy  boat.  Above  his  head  are  the  general  rules 
which  he  must  observe  —  the  United  States 
Government  regulations.  One  moment's  neglect 
of  his  duty  would  be  sufficient  to  send  his  boat 
crashing  into  some  danger.  But  day  and  night, 
winter  and  summer,  he  stands  skillfully  at  the 
wheel,  and  brings  his  boat  safely  to  her  destina- 
tion. 

The  vice-president's  position  is  hard  to  gener- 
alize. As  a  rule,  the  position  is  an  honorary  one. 
In  some  cases,  however,  where  the  president  is 
an  honorary  dignitary  himself,  the  vice-president 
may  be  the  executive  head  of  the  bank.  In  the 
larger  banks,  active  vice-presidents  tend  to  spe- 
cialize in  certain  of  the  executive  functions.    For 


42  PRACTICAL  BANKING 

instance,  the  duty  of  one  may  be  to  visit  the 
bank's  correspondents  or  to  receive  their  repre- 
sentatives when  they  call  to  pay  their  business 
respects;  of  another,  to  act  as  a  specialist  in  the 
granting  of  certain  lines  of  credit  —  and  so  on ! 


CHAPTER  IV 


THE  CASHIER 


The  cashier  is  subordinate  in  rank  to  the  presi- 
dent. He  has  direct  charge  of  the  force  of  em- 
ployees. If  the  president's  office  is  the  great  brain 
of  the  bank,  certainly  the  cashier's  office  is  the 
great  arm. 

Ordinarily,  the  cashier  has  only  such  duties  as 
are  necessary  to  move  the  machinery  of  the  bank, 
but,  in  the  absence  of  the  president,  he  sometimes 
assumes  the  highest  executive  functions.  He 
keeps  the  men  in  line,  so  to  speak,  and  adjusts 
all  local  difficulties.  To  him  the  men  come  with 
their  problems.  To  him  they  report  progress  or 
failure.   He  personally  supervises  their  work. 

Often,  during  the  day,  things  arise  to  be  settled, 
over  which  tellers  or  other  clerks  have  no  author- 
ity, but  which  do  not  properly  come  under  the 
president's  duties.  The  cashier  undertakes  to 
adjust  such  matters.  Examples  of  these  may  be, 
the  question  of  cashing  foreign  checks  for  persons 
carrying  no  account,  or  the  granting  of  a  tempo- 
rary overdraft  to  a  good  customer. 

In  a  great  banking  institution  of  the  metrop- 
olis, the  duties  of  the  cashier  become  very  com- 
plex and  taxing.  He  has  so  many  tasks  crowding 
in  upon  him,  and  so  much  to  look  after,  that  it  is 
necessary  to  provide  him  with  assistants,  who 
form  a  grade  still  nearer  the  rank  and  file  and 
have  jurisdiction  over  special  phases  of  the  work. 


44  PRACTICAL  BANKING 

To  take  a  supposititious  case:  say  one  assistant 
cashier  is  in  charge  of  the  bank's  bookkeeping; 
another  of  the  tellers;  a  third  supervises  exchange, 
collections,  and  perhaps  the  note  department;  a 
fourth  opens  accounts  and  is  a  lobbyist  —  that  is, 
he  has  a  desk  in  the  lobby,  greeting  customers, 
when  it  is  good  policy  to  do  so,  and  performing 
other  duties  which  may  arise.  It  should  be  paren- 
thetically stated  that  many  banks  designate  one 
of  the  clerical  force  to  open  accounts,  but  in  a 
bank  of  moderate  size,  it  has  proved  very  satis- 
factory to  attach  this  duty  to  the  cashier  or  one  of 
his  assistants. 

In  that  very  important  branch  of  a  bank,  its 
relations  with  other  banks,  the  cashier  is  always 
active.  He  carries  on  most  of,  the  ordinary  corre- 
spondence with  them,  makes  arrangements  for 
the  advantageous  handling  of  items,  secures  ac- 
counts and  rights  differences  which  may  come  up 
between  his  bank  and  another. 

Another  duty  which  requires  much  time  from 
him  and  his  assistants  is  the  signing  of  checks  and 
other  documents.  That  common  instrument,  the 
cashier's  check,  drawn  by  the  bank  on  itself,  is 
so  called  because  it  is  usually  signed  by  him.  This 
check  is  used  to  discharge  local  debts  of  the  bank, 
to  pay  dividends,  and  is  sometimes  issued  to  per- 
sons who  prefer  it  to  other  forms  of  exchange. 
The  proceeds  of  some  loans  and  discounts  are  also 
paid  by  means  of  it. 

Then,  too,  every  draft  of  a  bank  on  its  corre- 
spondents must  be  signed  by  the  cashier.  These 
amount  to  many  in  a  day:  remittances  sent  for 
cash  items  received;  remittances  for  banks  which 


THE  CASHIER  45 

order  a  part  or  all  of  their  balance  forwarded; 
checks  for  people  who  buy  exchange  on  other 
cities.  In  addition  to  these  checks  and  drafts,  the 
cashier  signs  various  government  and  state 
reports,  acknowledges  remittances  of  interest  or 
advises  credit  of  same. 

In  controlling  the  work  of  the  departments, 
the  cashier  must  pay  especial  attention  to  means 
for  preventing  fraud.  This  is  likely  to  come  up  in 
more  guises  than  simple  forgery  or  counterfeiting. 
Stopping  payment  of  checks  unnecessarily  is  often 
an  attempt  at  fraud.  "Kiting"  is  another  form. 
"Kiting"  consists  in  drawing  a  check  on  one  bank 
and  depositing  it  at  another;  then  issuing  checks 
against  the  account  and  trying  to  get  them  paid 
before  the  deposited  check  is  presented  at  the 
other  bank.  Or  perhaps,  the  "kiter"  also  deposits 
a  check  at  the  other  bank  on  the  first  one.  Then, 
if  the  check  from  the  first  is  sent  over  to  the 
second,  in  the  confusion,  it  may  be  certified,  for 
apparently  the  "kiter"  has  a  credit  balance  on 
the  books.  Most  banks  obviate  this  source  of 
danger  by  refusing  to  honor  checks  on  an  account 
opened  with  a  check  until  that  check  has  been 
paid.  But  it  does  happen  in  the  case  of  persons 
who  have  been  carrying  accounts  and  suddenly 
begin  "kiting." 

Another  form  of  fraud  is  by  means  of  "dum- 
mies." These,  as  the  name  implies,  are  fictitious 
persons  in  other  cities  on  whom  people  make 
drafts  for  pretended  indebtedness.  If  the  luckless 
teller  pays  such  a  one  or  the  cashier  authorizes 
payment,  it  is  simply  a  question  of  how  great  the 
loss  is. 


46  PRACTICAL  BANKING 

An  important  duty  of  the  cashier,  one  that 
cannot  be  overlooked,  is  the  rather  frequent 
auditing  of  the  work  of  each  of  the  clerks.  It  is 
much  better  to  do  this  often  and  thoroughly  than 
to  let  it  lag  and  never  know  how  "crooked"  the 
work  of  some  of  the  clerks  may  be.  Confidence 
in  men  is  by  no  means  infallible  protection  against 
their  dishonesty.  No  man  ever  defaults  who  is 
suspected  at  first;  his  very  occupancy  of  a  respon- 
sible position  is  proof  of  confidence. 

The  paying  teller's  cash  is  in  most  instances 
audited  at  least  once  a  month.  This  clerk,  unfor- 
tunately, has  had  more  falls  than  any  other  of  the 
subordinate  employees  of  the  bank.  His  tempta- 
tions are  great,  and  if  he  is  weak  and  knows  that 
no  frequent  audits  will  be  made  of  his  cash,  he 
may  fall.  There  is  a  distinct  moral  effect  in  know- 
ing that  his  cash  is  going  to  be  audited  carefully 
rather  frequently. 

Not  only  should  the  paying  teller's  cash  be 
audited,  but  the  ledgers  of  the  bank  ought  to  be 
checked  up  every  so  often.  One  big  bank  in 
New  York  audits  the  whole  institution  once  a 
month.  The  assistant  cashiers  take  turns  in  con- 
ducting the  examination.  In  counting  the  cash  of 
the  paying  teller  and  in  other  detail,  several 
clerks  are  taken  out  of  their  departments  to  assist, 
for  which  they  receive  extra  remuneration.  This 
same  bank  —  as  many  banks  do  —  shifts  its  men 
from  position  to  position,  never  letting  them  fall 
into  ruts  in  any  one  place.  As  a  friend  of  the 
author's  once  rather  fancifully  put  it,  no  bank 
should  ever  let  an  employee  think  that  his  posi- 
tion was  "his  own  horse,  and  that  no  one  else 


THE  CASHIER  47 

could  ride  it."  This  habit  of  shifting  certainly 
lessens  the  chance  of  dishonesty. 

In  this  particular,  I  am  reminded  of  how  an 
individual  bookkeeper,  perfidious  and  dissatis- 
fied with  his  compensation,  cleverly  contrived  a 
scheme  for  getting  a  tidy  sum  quickly.  He  selected 
an  account  little  checked  on,  and  forged  a  check 
for  $10,000  on  it.  Next  he  deposited  the  check 
to  his  credit  in  a  suburban  bank  where  he  was  not 
known.  When  it  came  through  the  clearing  for 
payment,  he  took  it  from  the  other  checks,  posted 
it  to  the  account  and  slipped  it  into  the  check  file, 
not  leaving  it  to  be  examined  by  the  persons  who 
looked  over  the  day's  checks.  After  this  he  went 
out  to  his  bank  and  withdrew  the  $10,000  and 
had  his  book  balanced.  He  destroyed  his  pass- 
book and  the  check  with  which  he  had  withdrawn 
his  balance,  and  settled  back  to  his  position  as  if 
nothing  had  happened.  About  a  year  later,  the 
patron  whose  account  had  thus  suffered  ordered 
his  book  balanced.  He  was  much  chagrined  to 
find  a  charge  of  $10,000  against  him.  Examining 
the  check,  he  declared  it  a  forgery.  The  book- 
keeper stoutly  denied  any  knowledge  of  the  for- 
gery until  the  suburban  bank,  whose  indorsement 
appeared  on  the  back,  identified  him.  He  had  n't 
had  nerve  enough  to  destroy  the  check  when  it 
came  back,  or  he  possibly  would  not  have  been 
caught. 

The  subject  of  "reserve"  has  been  rather  fully 
discussed  in  the  first  chapter,  and  is  only  men- 
tioned here  in  connection  with  the  cashier's 
duties.  He  usually  has  charge  of  these  funds,  if, 
as  in  many  banks,  they  are  separate  from  current 


48  PRACTICAL  BANKING 

funds.  By  reserve  in  this  sense  is  meant  not  neces- 
sarily the  whole  amount  of  lawful  money  on  hand, 
but  that  part,  aside  from  that  for  daily  use,  which 
is  kept  for  extraordinary  demands.  The  cashier 
sees  that  a  proper  amount  of  reserve  is  always  on 
hand.  A  minimum  reserve  is  set  for  all  national 
and  most  state  banks,  but  in  some  localities  and 
under  some  conditions  it  is  necessary  to  keep  a 
larger  volume  on  hand  than  is  actually  required. 

In  the  certification  of  checks  the  signature  of 
some  oflBcer  is  usually  necessary,  though  in  many 
places  the  paying  teller  assumes  this  duty.  Gen- 
erally, however,  this  is  done  by  the  cashier  or  an 
assistant.  It  is  a  very  delicate  step,  as  it  is  abso- 
lutely necessary  to  ascertain  accurately  that  the 
check  is  "good"  before  certifying.  Whether  it  be 
"good"  or  "bad,"  it  must  be  paid  when  once  it 
is  certified.  Furthermore,  the  officer  in  a  national 
association,  who  certifies  a  check  where  there  are 
insufficient  or  no  funds,  is  liable  to  federal  prose- 
cution. 

In  a  number  of  banks,  usually  the  smaller  ones, 
the  cashier  has  some  loan-granting  power.  And 
in  a  bank  where  the  only  other  lending  officer  is 
the  president,  it  amounts  to  considerable  im- 
portance, especially  when  the  chief  is  absent. 
However,  this  power  does  not  often  extend  be- 
yond discounts  for  persons  having  a  standing 
credit,  except  in  the  case  of  certain  small  loans. 
But  this  is  not  an  infallible  rule,  for  in  some  large 
banks  the  cashier  has  broad  loan-granting  power. 

The  general  and  current  expense  items  of  the 
bank  are  ordinarily  subject  to  the  control  of  the 
cashier.    He  does  not  allow  bills  of  expense  to 


THE  CASHIER  49 

stand  out  longer  than  reasonable  —  usually  not 
more  than  a  month  from  the  date  of  the  debt's 
contraction.  In  the  prompt  payment  of  the  bank's 
debts,  he  lays  on  one  of  the  small  stones  which 
form  finally  the  strong  wall  of  the  institution's 
integrity.  Often  he  receives  bids  from  several 
good  houses  on  large  purchases  of  supplies  and 
sundries,  so  that  he  may  obtain  the  most  ad- 
vantageous rates. 

He  pays  the  salaries  of  the  clerks.  To  discharge 
this  duty,  he  issues  checks  or  cash,  or  even,  in 
some  instances,  places  a  credit  on  the  bank's  in- 
dividual ledgers  for  the  men,  against  which  they 
may  draw. 

Many  cashiers  keep  or  cause  to  be  kept  a  huge 
book,  on  which  is  entered  in  the  minutest  detail 
every  expenditure  which  the  bank  makes.  This 
may  take  the  form  of  a  voucher  registration  when 
vouchers  are  used  to  charge  expense  items  to  their 
proper  accounts.  This  register  is  divided  into 
sections,  showing  in  vertical  columns  the  amount 
of  expense  under  appropriate  heads,  such  as 
"salary,"  "insurance,"  and  "taxes." 

In  deciding  matters  of  policy  with  customers 
or  others  who  ask  accommodation  of  various 
sorts,  the  cashier  has  need  of  all  the  firmness  he 
can  command.  He  finds  himself  importuned  at 
every  step  by  people  who  must  be  refused.  But 
they  respect  him  the  more  for  his  firmness.  A 
good  friend  once  said  to  the  writer,  and  he  has 
always  remembered  it,  "A  business  man  often 
has  occasion  to  act  with  decision  and  prompti- 
tude. And  most  frequently  a  firm  decision, 
though  erroneous,  will  be  more  beneficial  than  a 


50  PRACTICAL  BANKING 

wavering  tendency."  Sometimes,  too,  crises  come 
which  demand  the  utmost  positiveness.  In  time 
of  panic  every  cashier  knows  what  it  is  to  be  be- 
sieged with  requests  of  accommodation  for  all 
sorts  of  emergencies.  Sometimes  it  is  wise  to  as- 
sent; frequently,  however,  a  refusal,  firm  and 
final,  must  be  given. 

Even  with  all  this  necessity  for  staunch  abid- 
ing by  the  right  course,  the  cashier  cannot  afford 
to  lose  his  consideration  for  the  feelings  of  others. 
He  never  fails  to  find  a  reward  for  courtesy  and 
equanimity.  One  officer  of  the  writer's  acquaint- 
ance is  so  affable  and  hearty  to  every  one  that  it 
has  been  said  of  him  that  many  people  applying 
for  credit  had  rather  be  turned  down  by  him  than 
be  accepted  by  another  man. 

In  leaving  the  cashier's  desk  to  take  up  in  de- 
tail the  work  of  the  departments  under  him,  let 
us  remember  that  he,  as  the  bank's  arm,  furnishes 
the  power  to  do  the  work  planned  by  the  bank's 
brain,  the  president. 


CHAPTER  V 


THE  PAYING  TELLER 


How  many  people,  when  they  pass  their  checks, 
properly  signed  and  indorsed,  through  the  wicket 
and  receive  the  amount  of  cash  called  for,  ever 
stop  to  think  of  the  tremendous  responsibility  of 
the  man  behind  the  counter.  Most,  we  may  pre- 
sume, with  a  half-envious  glance  at  the  stacks  of 
currency  and  trays  of  coin,  dismiss  all  thought  of 
the  teller  and  of  how  his  department  is  conducted. 
And  yet,  in  importance,  his  is  second  to  none  in 
the  bank.  Though  we  carry  on  more  than  ninety 
per  cent  of  our  business  by  credit,  that  is,  by 
check  or  draft,  we  Americans  have  not  yet 
reached  that  state  of  refinement  where  we  may 
do  away  with  all  cash  payments  and  deal  alone 
in  exchange  or  credits.  There  is  a  good  deal  of  the 
Missouri  spirit  in  the  most  of  us  on  certain  oc- 
casions. We  like  to  see  "the  coin."  And  so,  our 
banks  cannot  do  without  the  paying  teller. 

Some  one  has  remarked  that  a  bank  is  the  pulse 
of  business  generally  in  a  town  or  community. 
It  may  be  further  said  that  the  paying  depart- 
ment is  the  pulse  of  the  bank,  and  faithfully  reg- 
isters whether  the  management  is  conservative  or 
radical. 

Here,  as  in  no  other  department,  an  experi- 
enced, capable  man  is  required.  It  is  almost  es- 
sential that  a  paying  teller  should  have  a  good 
knowledge  of  bookkeeping,  as  his  duties  contin- 


52  PRACTICAL  BANKING 

ually  bring  him  in  touch  with  the  books  of  the 
bank.  He  should  be  well  acquainted  with  the 
general  status  of  as  many  of  the  bank's  cus- 
tomers as  possible.  Also,  he  must  have  an  accur- 
ate knowledge  of  the  signatures  of  customers; 
he  should  always  have  the  signatures  of  the 
bank's  depositors,  for  reference,  in  a  convenient 
file. 

It  is  obviously  impossible  for  a  paying  teller  to 
know  the  status  and  signature  of  every  customer 
in  a  large  bank.  Some  banks  have  supplied  their 
tellers  with  sheets  on  which  the  approximate 
balances  of  customers  is  entered.  Many  others 
adopt  the  plan  of  having  the  checks  passed  back 
to  the  bookkeepers  for  certification  before  pay- 
ment. These  methods  do  not  always  expedite 
matters  during  rush  hours.  In  Australia,  I  be- 
lieve, some  banks  have  adopted  what  appears  to 
be  a  practicable  scheme.  Those  having  checks  to 
cash  go  to  a  window  where  the  check  is  certified 
after  identification  and  verification.  Then  they 
file  on  to  the  paying  window,  where  the  checks 
are  promptly  paid. 

As  the  name  implies,  the  primary  duty  of  the 
paying  teller  is  to  pay  out  money.  This  primary 
duty  involves  many  accompanying  duties  of 
almost  equal  importance. 

The  paying  teller  has  charge  of  the  money 
vaults  and  safes  containing  current  funds.  The 
reserve,  as  defined  in  the  foregoing  chapter,  is 
usually  kept  separately  in  the  charge  of  an  officer 
of  the  bank.  The  duty  of  keeping  the  money 
vaults  is  not  a  light  one,  for  the  teller  must  at  all 
times  proceed  most  carefully  in  setting  time  locks. 


THE  PAYING  TELLER  53 

He  must  also  keep  his  money  in  good  order  and 
see  that  a  certain  volume  is  always  on  hand  to 
meet  any  emergency.  This  last  duty  is  also  im- 
posed upon  one  of  the  officers  of  the  bank,  as  it  is 
of  prime  importance.  In  the  great  banks,  no  one 
man  knows  the  entire  combination  to  the  money 
vaults,  but  two  or  three  each  know  a  part  of  it, 
so  that  the  presence  of  all  is  required  to  unlock. 

Some  banks  employ  more  than  one  paying 
teller.  In  that  case  there  is  a  senior  teller  who  has 
charge  of  the  vaults,  and  who  supplies  the  assist- 
ants with  a  certain  amount  of  money  each  day. 

In  the  paying-out  process,  our  teller  must 
maintain  his  mental  equilibrium  if  he  hopes  to 
be  in  any  way  successful.  For  a  man  to  "lose" 
his  head  with  a  long  line  of  impatient  customers 
before  his  window  is  disastrous.  Men  in  this  con- 
dition have  made  and  do  make  errors  that  are 
dangerous ;  they  may  seriously  misread  the  amount 
of  a  check  involving  a  difference  of  many  dollars ; 
they  may  accept  a  forged  check  or  one  dated 
ahead;  they  may  fail  to  require  proper  identifica- 
tion or  indorsement;  they  may  not  catch  a  check 
on  which  payment  has  been  ordered  stopped.  In 
fine,  the  paying  teller  may  soon  ruin  himself,  and 
perhaps  the  bank,  if  he  is  easily  flurried. 

He  must  carry  on  his  work  easily  and  smoothly. 
Numerous  incidents  occur  to  irritate  him;  some- 
times strangers  insist  upon  the  cashing  of  foreign 
or  even  of  home  checks  without  identification; 
people  sometimes  unnecessarily  hurry  a  teller 
who  is  working  "tooth  and  nail";  and  some  come 
after  hours  and  ask  accommodation  when  he  is 
busy  proving  up  his  work. 


54  PRACTICAL  BANKING 

One  is  reminded  of  the  little  old  man  who 
comes  in  every  Friday  afternoon,  just  after  bank- 
ing hours,  by  the  side  door.  He  always  leaves  his 
book  to  be  balanced,  to  be  sure  that  "the  bank 
has  made  no  mistake"  in  his  $105  account.  Then, 
to  prove  for  himself  that  the  institution  is  still 
solvent,  he  invariably  drops  by  the  paying  win- 
dow to  get  two  dollars  and  a  half  in  cash.  Such 
incidents  from  a  distance  wear  a  ludicrous  air, 
but  the  vivid  reality  often  makes  them  a  cause 
for  bitter  and  impotent  grinding  of  teeth. 

We  have  enumerated  but  a  few  of  the  many  in- 
stances which  may  cause  friction  between  the 
teller  and  certain  customers.  But  the  successful 
teller  learns  to  be  cool  and  polite  under  the  most 
trying  conditions.  He  must  pour  oil  on  the  trou- 
bled waters,  so  to  speak. 

The  paying  teller  is  more  likely  to  encounter 
frauds  than  any  other  clerk,  and,  if  heedless,  is 
sure  to  pay  bitterly  for  napping.  Counterfeit  cur- 
rency is  a  common  source  of  trouble.  Now  and 
then,  persons,  consciously  or  unconsciously,  pass 
bills  in  for  change,  etc.,  that  are  counterfeit.  And 
some  of  this  worthless  currency  is  so  cleverly  ex- 
ecuted that  it  is  next  to  impossible  to  detect  it. 
However,  the  following  are  common  defects. 
Either  the  paper  is  of  an  inferior  quality,  or  the 
engraving  is  rough,  or  else  there  is  a  slight  varia- 
tion in  the  frieze.  Then,  too,  there  are  genuine 
notes  whose  value  has  been  raised.  Some  of  these 
are  exceedingly  dangerous.  The  best  way  for  a 
teller  to  detect  counterfeits  is,  first,  to  have  an 
accurate  knowledge  of  the  different  notes  in  cir- 
culation, so  as  to  be  able  to  catch  any  ordinary 


THE  PAYING  TELLER  55 

imitation,  and  then,  to  keep  posted  through  the 
secret  service  of  the  existence  of  any  fine  counter- 
feits. 

It  is  a  comparatively  easy  matter  for  an  ex- 
perienced teller  to  detect  a  spurious  coin,  since 
it  is  usually  oversized  or  under.  A  bad  coin  is 
frequently  detected  by  its  ring  or  by  its  color. 

Counterfeit  gold  coins  are  more  dangerous  than 
silver,  for  their  large  value  makes  it  worth  while 
to  spend  much  time  on  their  execution.  In  one 
famous  case  the  counterfeiter  took  a  genuine 
double-eagle  and  cut  its  edges  to  a  depth  of  about 
a  quarter  of  an  inch.  He  next  turned  back  the 
sides  and  removed  two  thirds  of  the  gold,  leaving 
only  the  shell  of  the  coin.  He  filled  up  the  space 
¥'ith  a  foreign  metal  of  about  the  same  density 
us  gold,  closed  it  and  covered  the  split  edge  with 
gold  to  conceal  the  spurious  metal.  The  gold 
counterfeit  can  usually  be  detected  by  ringing  it 
on  the  marble  or  by  examining  closely  the  work- 
manship. 

Forgeries  are  by  no  means  negligible.  This 
kind  of  fraud  is  largely  of  two  kinds;  namely, 
forging  the  signature  of  a  bank's  customer,  and 
passing  a  check  signed  by  a  person  who  has  no 
account. 

Forging  the  signature  of  another  person  is  not 
an  easy  matter,  but  it  is  rather  commonly  in- 
dulged in.  This  sketch  will  not  permit  of  an  ade- 
quate discussion  of  the  different  methods  of  forg- 
ing a  bank  customer's  check.  However,  one  or 
two  clever  schemes  are  worth  noting. 

In  a  certain  Western  town,  a  man,  purporting 
to  be  a  representative  of  the  Government,  distri- 


56  PRACTICAL  BANKING 

buting  certain  pamphlets  of  the  Department  of 
Agriculture,  approached  one  of  the  leading  citi- 
zens to  supply  him  with  a  copy,  requiring  only 
his  receipt  in  a  small  notebook.  The  citizen 
readily  signed  the  notebook  and  thought  no  more 
of  it.  In  reality,  under  the  sheet  which  he  signed 
was  a  draft  on  his  bank  to  which  his  signature  was 
fixed  by  means  of  a  carbon  sheet.  The  pseudo- 
government  man  filled  out  the  draft  for  a  large 
amount  and  presented  it  for  payment.  But  the 
teller,  suspecting  something  wrong,  held  the  man 
pending  an  investigation  of  the  check.  Of  course, 
the  forger  received  his  just  punishment. 

The  following  incident  is  from  an  address  of  Mr. 
Cullom  W.  Kay  before  the  American  Institute  of 
Banking:  — 

Not  long  ago,  on  a  busy  Saturday,  a  well-dressed 
fellow  joined  the  line,  and  in  his  turn  presented  a  check 
for  $3500  to  one  of  our  tellers.  It  was  recognized  im- 
mediately to  be  a  forgery  of  the  personal  or  individual 
signature  of  a  member  of  a  prominent  local  business 
firm,  and  the  teller  was  aware  of  the  fact  that  he  did 
not  keep  a  personal  account,  so  the  detection  was  easy 
enough  to  make.  To  make  the  fellow  believe  he  was 
going  to  get  the  money,  he  was  told  to  wait  a  moment 
in  order  that  we  might  see  if  the  check  was  good,  the 
teller  in  the  mean  time  waiting  on  the  customers  as 
they  came  up  to  the  window  one  after  another  and 
keeping  his  eye  on  the  fellow  and  the  bank's  detective 
to  see  that  they  did  not  get  too  far  apart.  When  the 
assistant  teller  returned  the  check  and  stated  there  was 
no  account  under  that  name  as  an  individual,  the 
forger  was  politely  asked  to  go  to  the  office  in  the  rear. 
Apparently  he  felt  so  sure  that  he  would  get  the  money 
that  he  did  not  hesitate  to  follow  the  teller  to  the 


THE   PAYING  TELLER  57 

cashier's  rail,  where  the  teller  turned  the  check  over  to 
that  official  and  introduced  the  forger  as  an  interesting 
person,  who  would  have  to  account  for  having  such 
a  check  in  his  hands.  The  teller  sent  the  detective 
back  to  the  rear  office  almost  immediately  afterward 
to  "stand  by,"  and  then  went  on  with  his  work,  and 
shortly  afterwards  noticed  above  the  heads  of  the 
crowd  of  customers  that  the  rascal  went  out  with  the 
local  detective  and  was  placed  in  an  automobile  and 
taken  to  prison.  The  fellow  was  convicted  and  is  now 
serving  fifteen  years  in  the  penitentiary.  The  cus- 
tomers did  not  notice  anything  unusual,  and  the  teller 
did  not  lose  three  minutes  from  his  work.  The  effect 
of  this  kind  of  experience  to  one  who  handles  many 
checks  is  that  he  is  worried  for  days  afterwards,  and 
strains  his  eyes  looking  for  defects  in  signatures  and 
is  very  apt  to  be  unusually  nervous  for  some  time. 

In  regard  to  the  forging  of  the  name  of  a  person 
to  whose  credit  there  is  no  money,  let  it  suffice  to 
say  that  this  is  frequently  done,  but  the  check  is 
usually  cashed  at  a  bank  other  than  the  one  on 
which  it  is  drawn,  or  else  it  is  foisted  on  some 
luckless  shopkeeper. 

Garnishments  are  generally  served  on  the 
cashier  or  paying  teller,  and  in  either  case  the 
teller,  as  well  as  the  proper  individual  book- 
keeper, must  have  a  memorandum  of  them  be- 
fore him  in  order  to  prevent  payment  of  checks 
against  the  accounts  garnished. 

There  are  always  some  people  who  issue  checks 
and  wish  to  have  payment  stopped  on  them. 
Whether  it  be  that  some  contract  has  been  vio- 
lated by  the  payee  or  whether,  for  some  strange, 
unknown,  subterranean  reason,  the  maker  does 
not  wish  his  check  honored,  payment  must  be 


58  PRACTICAL  BANKING 

declined  or  the  bank  will  be  liable  for  the  amount 
of  the  check  and  will,  most  probably,  incur  the 
lasting  enmity  of  the  customer.  So  the  paying 
teller  keeps  a  file  of  orders  stopping  payment  of 
checks.  As  a  bank  is  liable  to  accumulate  a  num- 
ber of  persons  who  more  or  less  frequently  stop 
payment  of  checks  for  no  good  reason  apparently, 
the  paying  teller  should  note  the  ones  who  make 
a  practice  of  it,  and,  after  conference  with  the 
proper  officer,  should  request  that  the  accounts 
be  closed. 

After  the  bank  is  closed,  the  teller  begins  work 
for  his  balance.  He  must  count  his  money,  take 
into  consideration  any  money  which  he  may  have 
distributed  to  other  tellers,  and  record  all  home, 
clearing,  and  foreign  checks  taken  in  by  himself. 
If  he  has  opened  new  accounts,  as  he  does  in  some 
banks,  he  must  have  a  record  of  their  deposit 
slips.  He  probably  has  taken  in  all  cash  deposits 
from  other  banks.  His  balance  of  cash  for  the 
previous  day,  together  with  all  credit  items,  such 
as  deposits,  new  currency  put  into  circulation, 
exchange  collected,  general  expense  credits,  items 
sent  to  the  clearing  house,  etc.,  must  be  made  to 
balance  with  the  present  amount  of  cash  on  hand, 
along  with  all  disbursements  on  checks,  general 
expense,  notes  discounted,  exchange,  amount  of 
checks  received  from  the  clearing  house,  etc. 

It  should  be  noted,  however,  that  many  banks 
have  the  clearing  charged  directly  to  a  clearing 
clerk.  But  in  many  others  the  charges  and  credits 
for  the  same  run  through  the  paying  teller's  book. 

It  has  been  a  popular  saying  among  paying 
tellers  generally  that  it  is  impossible  to  balance 


THE  PAYING  TELLER  59 

consistently  in  the  paying  window  *'to  a  cent"; 
that  is,  there  is  almost  always  an  overage  or 
shortage,  great  or  small.  The  writer  became  pay- 
ing teller  imbued  with  this  venerable  idea.  It  so 
happened  that  the  president  of  the  bank  was  not 
a  man  to  be  tied  down  to  tradition,  and  one  of  his 
theories  was  that  a  teller,  as  well  as  a  bookkeeper, 
should  be  held  responsible  for  an  exact  balance, 
despite  the  fact  that,  if  a  teller  paid  out  too  much 
money  to  a  person,  he  rarely  got  it  back.  So  a 
scheme  was  evolved  for  balancing  exactly,  put 
into  practice,  and,  it  must  be  said,  it  worked  mar- 
velously  well,  so  well,  indeed,  that,  in  one  period 
of  nine  months,  there  were  only  a  half-dozen 
misbalances.  After  having  his  theory  shattered, 
the  writer  began  to  investigate  the  records  of 
other  tellers  more  closely  and  discovered  that,  in 
most  cases,  the  teller  who  balanced  ojtenest  was 
the  man  of  whom  it  was  required  to  balance  with 
a  fair  degree  of  regularity. 

We  must  pass  to  a  brief  consideration  of  a  few 
of  the  remaining  important  duties  of  the  paying 
teller.  He  collects  all  cash  after  balances  and 
stows  it  away  in  the  vaults  until  the  following 
business  day.  Frequently,  in  the  smaller  banks, 
the  paying  teller  is  assigned  to  the  duty  of  verify- 
ing dates,  signatures,  and  indorsements  on  home 
checks.  In  the  national  associations,  he  some- 
times receives  government  and  post-office  de- 
posits and  sends  weekly  transcripts  of  the  govern- 
ment account  to  Washington.  Likewise,  if  it  be 
a  bank  under  United  States  supervision,  the  pay- 
ing teller  must  keep  his  currency  segregated.  In 
banks  where  his  duties  are  more  or  less  light,  he 


60  PRACTICAL  BANKING 

frequently  has  some  miscellaneous  duties,  such 
as  control  of  the  record  of  canceled  and  outstand- 
ing cashier's  and  certified  checks,  certificates  of 
deposit,  etc. 


CHAPTER  VI 

THE  RECEIVING  TELLER 

We  need  give  no  formal  introduction  to  the 
receiving  teller,  for  everybody  knows  him.  In- 
deed, many  people  will  wonder  at  a  discussion  of 
his  duties,  for  they  seem  so  apparent.  Yet  there 
are  probably  many  inside  features  of  a  receiving 
teller's  work  quite  unknown  to  the  average  bank 
customer.  We  are  familiar  with  the  cheerful 
little  man  behind  the  window,  who  passes  a  pleas- 
ant word  about  business  or  the  weather,  while  he 
energetically  counts  over  our  currency  and  veri- 
fies the  check  entries  on  our  deposit  slips.  The 
functions  of  his  position,  to  a  casual  observer, 
seem  quite  simple  —  indeed,  just  taking  in  a  huge 
mass  of  checks,  coin,  and  bills,  assorting  them 
quickly,  and  checking  them  off  the  ticket;  just 
adding  up  the  little  slips  and  glancing  at  the  in- 
dorsements on  the  checks;  just  making  a  hasty 
entry  on  your  pass-book,  and  then  —  "Next!'* 
But  we  shall  soon  see  that  these  primary  duties 
involve  a  complexity  of  secondary  or  incidental 
tasks. 

It  would  be  about  as  easy  to  discover  accurate 
generalities  in  describing  the  receiving  tellers  in 
over  twenty  thousand  banks  as  it  would  be  in 
discussing,  with  a  few  bold  and  well-selected 
strokes,  "The  Growth  of  the  Spirit  of  Resistance 
in  New  England."  For  in  every  bank,  no  matter 
how   inconspicuous,   there   are   certain   peculiar 


62  PRACTICAL   BANKING 

methods  of  handling  the  business,  due  to  the  nec- 
essary adaptation  to  local  conditions.  It  would 
hardly  be  an  exaggeration  to  say  that  there  are 
individuality  and  originality  in  the  division  and 
allotment  of  duties  in  every  bank  in  the  country. 
Therefore,  it  will  be  necessary  to  construct  an 
ideal  receiving  teller,  one  whose  clerical  obliga- 
tions include  those  which  appear  best  to  pertain 
to  his  office.  It  may  be  that  some  duty  of  a  New 
York  teller  may  stand  side  by  side  with  that  of  a 
country  clerk. 

There  are  from  one  to  a  half-dozen  receiving 
tellers  in  a  bank,  the  number,  of  course,  depend- 
ing on  the  volume  of  individual  depositing.  Save 
for  a  head  of  the  department  in  large  banks,  who 
is  responsible  for  the  work  of  his  subordinates, 
the  receiving  tellers  are  on  an  apparently  equal 
footing,  and  their  duties  are  essentially  the  same. 
In  many  banks,  each  is  assigned  to  a  certain  di- 
vision of  the  alphabetically  arranged  bank's  cus- 
tomers. This  alphabetical  division,  however,  is 
not  the  universal  practice. 

Some  one  has  said  that  the  receiving  teller's 
window  is  the  cleanest  clerical  position  in  the 
bank,  because  he  begins  each  day  on  a  fresh  sheet, 
with  no  differences  carried  over.  WTien  the  bank 
opens,  his  trays  and  money  drawers  are  empty 
and  his  record  clean.  After  his  proof  each  day, 
he  turns  over  his  cash  to  the  paying  teller,  his 
clearing  to  the  clearing  clerk,  his  foreign  items  to 
the  transit  department,  etc.,  having  charged,  in 
each  case,  the  proper  amount  to  the  appropriate 
department.  Then  he  is  ready  to  start  another 
day. 


THE  RECEIVING  TELLER  63 

But  to  resume  with  our  ideal  teller  on  an  ideal 
day !  Soon  after  the  bank  opens  its  doors  his  work 
begins  and  continues,  with  perhaps  occasional 
lulls,  until  banking  hours  are  over  —  far  longer, 
probably,  but  the  actual  receipt  of  deposits  ends 
with  the  closing  hour. 

In  the  course  of  the  day,  many  things  will  arise 
which  require  open-eyed  attention.  Perhaps  there 
is  a  forged  check  or  one  which  has  some  evident 
informality.  These  he  watches  out  for.  There 
may  be  a  long  line  of  customers  before  his  win- 
dow and  yet  he  cannot  afford  to  become  excited 
and  so  overlook  some  apparent  fraud.  As  a  general 
rule,  it  may  be  said  that  checks,  forged  or  other- 
wise invalid,  are  not  as  likely  to  cause  actual  loss 
to  him  or  to  the  bank,  as  in  the  case  of  the  paying 
teller.  This  is  readily  seen,  for  in  almost  every 
instance  such  checks  may,  on  discovery  of  their 
invalidity,  be  charged  back  to  the  depositor's 
account. 

But  to  protect  the  bank  and  himself  against 
possible  loss,  he  closely  watches  for  all  invalid 
checks,  especially  those  rendered  so  by  lack  of 
indorsement.  The  latter  is  important  because 
frequently  an  unindorsed  check  cannot  be  charged 
back  to  customers,  since  it  is  not  known  by  whom 
it  was  deposited.  Of  course,  it  can  often  be  traced 
by  comparing  check  entries  on  the  deposit  slips 
of  the  day  with  all  lists  of  checks  taken  from  his 
window,  but  this  is  tedious  and  uncertain  at  best. 

The  teller  knows  too  well  how  common  rogues 
are,  and  how  prolific  their  handiwork  is  in  the 
shape  of  counterfeited  money,  to  be  anything 
short  of  vigilant.    We  have  shown  some  of  the 


64  PRACTICAL  BANKING 

means  of  detecting  counterfeits  in  the  foregoing 
chapter,  and  will  not  discuss  them  again  here. 

Our  teller  is  successful;  therefore,  he  has  a  cool 
head,  and  a  quick  and  accurate  perception.  It 
seems  to  an  old  teller  that  one  of  the  supreme 
shortcomings  of  the  human  race  is  its  inaccu- 
racy in  making  out  deposit  slips.  It  would  take 
tomes  to  tell  of  the  thousand  and  one  peculiar 
and  ludicrous  mistakes  which  some  bank  cus- 
tomers commit  when  preparing  their  deposits. 
Did  we  say  "ludicrous  mistakes".''  Often  they 
smack  of  tragedy.  It  may  be  funny  enough  to 
remind  a  patron  that  the  "$10  in  Gold"  listed 
on  his  slip  must  be  in  his  vest  pocket;  but  during 
the  tedious  process  of  checking  over  deposit  slips 
till  late  at  night  to  find  a  "balance"  in  some  man's 
ticket  with  an  item  listed  wrong,  the  disappointed 
teller  may  feel  any  way  but  humorous.  His  mood 
may  approximate  Malvolio's,  but  certainly  not 
Feste's. 

It  may  be  argued  that  a  teller  should  detect  all 
errors  as  he  takes  in  the  deposits,  but  in  a  "rush" 
it  is  practically  impossible  to  do  everything  as 
thoroughly  as  it  ought  to  be  done.  It  seems  to  be 
the  better  plan  to  check  off  the  items  as  carefully 
as  possible  and  note  the  indorsements,  leaving 
verification  in  other  particulars  for  a  later  hour,  if 
necessary. 

Too  many  slips  are  filled  out  with  one  or  two 
very  ambiguous  figures.  In  checking  items  off  the 
ticket  rapidly,  the  teller  may  easily  take  such  a 
figure  to  be  what  the  check  reads,  when  a  careful 
footing  up  would  show  that  it  was  added  in  as 
something  else. 


THE  RECEIVING  TELLER  65 

Not  only  does  our  teller  realize  the  time  gained 
by  watching  these  items,  but  he  is  aware  of  the 
absolute  indispensableness  of  requiring  indorse- 
ments on  checks.  Several  imperative  reasons  are 
apparent  for  this.  First  of  all,  if  an  indorsement 
does  not  appear  on  the  check,  the  payee  may 
claim  not  to  have  received  the  money  on  the 
check  and  may  demand  repayment.  Second,  if 
the  payee  makes  no  complaint,  the  drawer  or 
maker  may  refuse  to  have  the  check  charged  to 
his  account  unless  properly  indorsed.  It  may  be 
remarked  here  that  thousands  of  purely  technical 
errors  in  indorsing — where  good  faith  is  evident — 
are  corrected  by  tellers.  These  are  such  as  leaving 
the  "&"  out  in  "Smith,  Jones  &  Perry."  Third, 
absence  of  indorsement  prevents  ready  and  easy 
*'  charging  back  "  of  invalid  checks  to  the  proper 
parties. 

Exchange  charges  is  an  item  which  may,  by 
strict  application,  cease  to  be  a  source  of  loss  to 
the  bank.  So  many  people  cannot  understand 
why,  if  they  keep  a  hundred  dollars  on  deposit, 
the  bank  should  not  accept  foreign  checks  for 
them  without  charge  for  collection.  Waiving  the 
exchange  which  banks  in  some  cities  are  obliged 
to  charge  on  certain  checks,  on  account  of  clear- 
ing-house regulations,  it  is  perfectly  rational  that 
a  bank,  accommodating  a  small  depositor  on  gen- 
eral principles,  —  for  no  one  accuses  it  of  making 
money  from  him,  —  should  charge  an  exchange 
rate  on  checks  which  in  all  probability  it  will  have 
to  pay  to  get  collected.  Naturally  enough,  to  a 
certain  class  of  customers,  all  checks  are  accepted 
at  par,  so  far  as  it  does  not  conflict  with  any 
clearing  house  rule. 


66  PRACTICAL  BANKING 

A  knowledge  of  the  signatures  of  the  bank's 
customers  should  come  within  the  range  of  the 
receiving  teller's  duties.  With  this  knowledge  he 
is  in  position  to  detect  many  frauds  in  the  at- 
tempt to  deposit  bogus  or  forged  home  checks. 

After  a  day  full  of  nerve-trying  experience  with 
irascible  patrons,  who  rage  because  of  collection 
charges,  "not  good"  checks,  or  counterfeit  notes 
in  their  deposits;  after  an  effort  to  assuage  their 
irritability  by  the  " oil-on-the-water "  method; 
after  being  interrupted  time  and  again  to  give 
some  trivial  information;  after  tiring  himself  out 
with  the  exercise  of  constant  wariness  to  detect 
frauds  and  to  be  perfectly  accurate,  the  teller 
prepares  to  try  for  a  balance  as  quickly  as  possi- 
ble. 

In  some  banks,  where  two  or  more  tellers  are 
employed,  several  balances  are  taken  during  the 
day.  The  operation  is  simple.  Number  one 
teller,  say,  closes  his  window,  thus  turning  his 
depositors  through  number  two.  Number  one 
then  quickly  balances  and  gives  over  his  deposit 
slips  and  his  checks  —  home,  clearing,  and  for- 
eign —  to  their  appropriate  departments,  charges 
himself  with  the  amount  of  cash  which  he  has  and 
reopens  his  window.  In  other  banks,  where  only 
one  balance  per  day  is  taken,  the  deposits  and 
checks  are  collected  once  or  twice  during  hours, 
listed  and  carefully  verified. 

When  the  bank  closes,  the  teller  first  lists,  or 
has  listed,  all  deposit  slips  and  cash  items  in  his 
cage.  This  must  be  done  at  once  in  order  not  to 
delay  the  bookkeepers.  After  this,  he  begins  the 
task  of  segregating  and  counting  his  currency. 


THE  RECEIVING  TELLER  67 

This  may  be  quite  an  arduous  undertaking  in 
many  banks,  while  in  others,  which  receive  the 
vast  majority  of  their  deposits  in  checks  and  dis- 
counts, it  may  not  be  so  taxing.  As  a  rule,  how- 
ever, it  may  be  said  that  the  smaller  the  bank,  the 
more  it  caters  to  cash  depositors  and  the  less  it 
depends  on  lending  and  discounting  to  create  its 
deposits.  It  is  quite  possible  that  the  teller  may 
do  much  of  this  counting,  bundling  up,  and  segre- 
gating at  odd  moments  during  the  day.  By  seg- 
regation is  meant  not  only  separation  into  their 
respective  denominations,  but  also,  and  especially 
so  in  the  national  bank,  the  separation  into  the 
different  kinds  of  bills,  e.g.,  gold  certificates, 
silver  certificates,  national  bank  notes,  etc. 

It  has  been  found  convenient  among  clearing- 
house associations  to  adopt  some  regular  scheme 
for  bundling  up  the  currency  bills  of  its  members. 
Many  use  the  fifty  bill  standard;  that  is,  each 
package  contains  fifty  bills  of  the  same  denomi- 
nation. The  various  denominations  are  distin- 
guished by  different  colored  bands  with  which  the 
packages  are  bound.  The  color,  then,  of  the  band 
at  once  shows  what  amount  is  in  the  bundle  as 
well  as  the  denomination.  The  banks  themselves 
usually  require  the  teller  who  counts  out  the  pack- 
age to  initial  it.  Thus  one  city  has  white  bands 
inclosing  $50  each  for  ones  and  twos;  blue  bands 
inclosing  $250  each  for  fives;  yellow  bands  inclos- 
ing $500  each  for  tens ;  and  red  bands  inclosing 
$1000  each  for  twenties.  The  United  States  Treas- 
ury has  a  custom  of  putting  one  hundred  bills  of 
each  denomination  to  the  package. 

Coin  is  counted  and  put  up  in  two  ways.  First, 


68  PRACTICAL  BANKING 

in  trays.  These  trays  are  built  in  varying  sizes, 
generally  to  accommodate  five  hundred  coins. 
They  are  only  used  for  the  three  highest  silver 
coins,  and  for  gold.  In  many  instances  a  tray 
contains  five  rows  of  five  stacks  each  of  coins, 
each  stack  containing  twenty  pieces.  Dimes, 
nickels,  and  cents  for  current  use  are  usually  put 
up  in  small  envelopes  containing  $5,  $2.50,  or 
$1.  The  second  method  of  putting  up  coins  is  in 
packages.  This  applies  to  fractional  silver,  nickels, 
and  copper  coins  more  readily  than  to  dollars. 
Gold  is  not  put  up  in  these  packages  at  all.  The 
package  is  nothing  more  than  a  small  cylindrical 
piece  of  stiff  paper  fastened  about  a  stack  of  coins, 
each  containing  ten  dollars  in  the  case  of  halves 
and  dollars,  five  dollars  in  the  case  of  quarters, 
and  five,  two,  or  one  dollar  in  the  case  of  smaller 
coins.  Coins  are  kept  in  stout,  canvas  bags  when 
stowed  away  in  safes  and  vaults. 

It  is  very  interesting  to  note  the  parts  of  the 
country  where  coins  are  most  used.  In  the  North 
and  East,  coins  —  especially  the  large  silver 
pieces  —  are  scarcely  used  at  all.  In  one  large 
bank,  in  the  author's  mind,  with  deposits  far  up 
in  the  tens  of  millions,  two  or  three  thousand 
silver  dollars  and  a  small  amount  of  subsidiary 
silver  is  found  to  be  quite  suflBcient  for  all  de- 
mands. Gold  is  rarely  used  except  for  reserve  and 
for  transactions  between  banks.  A  glance  at  the 
receiving-teller's  cage  with  a  scant  number  of 
trays  poorly  filled  convinces  one  that  coins  are 
not  popular  in  this  part  of  the  country.  In  the 
South  and  Southwest,  silver  and  gold  are  very 
much  in  demand  and  in  evidence.  A  bank  in  Ala- 


THE  RECEIVING  TELLER  69 

bama  with  a  capital  of  $100,000  will  probably 
keep  more  silver  on  hand  than  a  bank  in  New 
York  with  $1,000,000.  In  the  Far  West,  gold  is 
most  popular,  and  it  is  related  that  many  of  the 
natives  look  with  great  suspicion  on  paper  cur- 
rency, and  that  country  shopkeepers  are  likely 
to  refuse  it. 

Where  there  is  much  to  handle,  the  counting  of 
fractional  coins  would  be  almost  an  endless  task 
but  for  the  counting-machines  which  the  larger 
banks  use.  These  machines  may  be  adjusted  to 
count  dollars,  halves,  quarters,  and  smaller 
change.  By  simply  dumping  the  coins  into  a  pan 
and  turning  a  crank,  one  may  count  almost  as 
fast  as  he  pleases.  A  small  indicator  registers  the 
number  of  pieces  handled,  or  one  may  set  a  pin 
to  stop  the  counter  automatically  when  the  de- 
sired number  of  coins  is  reached.  Street  railways, 
motion-picture  theaters,  and  popular  summer  at- 
tractions pour  vast  streams  of  small  coin  into 
their  banks.  It  is  in  packages  when  deposited  and 
for  the  time  is  accepted  at  its  face  value,  but  the 
count  must  be  verified.  In  the  days  before  the 
money  counting-machine,  one  bank  of  my  ac- 
quaintance used  to  press  all  of  its  tellers  and  some 
utility  clerks  into  service  once  a  week  to  count 
the  street-car  company's  deposited  change. 

After  his  money  is  counted,  the  teller  makes  an 
entry  on  the  debit  side  of  his  book  for  its  total. 
Then  on  the  same  side  he  lists  the  totals  of  the 
bundles  of  checks  and  other  cash  items  which  he 
has  turned  over  to  the  individual  books,  to  the 
clearing  clerk,  to  the  foreign  department,  and 
those  which  he  still  has  on  hand.    On  the  credit 


70  PRACTICAL  BANKING 

side  of  his  record  appears  the  total  of  deposits 
and  the  exchange  collected.  The  problem  is  to 
make  the  footing  of  the  two  sides  of  his  book 
coincide. 

Some  of  the  stumbling-blocks  to  a  speedy  bal- 
ance are  errors  in  counting  money,  errors  in  the 
addition  of  deposit  slips,  and  errors  in  entering 
items  on  the  deposit  slip. 

Errors  in  counting  money  are  of  three  kinds :  — 

First,  the  money  may  have  been  miscounted 
when  the  deposit  was  made.  If  it  was  incorrectly 
entered  on  the  slip,  and,  in  his  haste,  the  teller's 
count  coincided  with  the  amount  entered;  or, 
when  it  was  correctly  set  down,  if  he  changed  the 
entry  to  agree  with  his  calculation,  there  is  small 
chance  that  he  will  be  able  to  recover  a  shortage 
or  refund  an  overage.  If,  however,  the  error  was 
committed  on  the  slip  of  a  firm  keeping  an  ac- 
curate set  of  books,  the  difference  may  often  be 
located.  In  that  instance  it  is  practically  always 
noticed  by  the  firm.  But  in  the  case  of  nine  out  of 
ten  individuals,  the  discrepancy  would  not  be 
noted. 

Second,  the  teller  may  have  assorted  his  paper 
currency  wrong;  e.g.,  put  a  five-dollar  bill  in  a 
package  of  tens.  This  rather  common  error  ought 
to  be  found  on  a  second  count  of  the  packages. 
Mistakes  of  this  kind  in  counting  coins  are  not 
frequent,  though  they  sometimes  happen. 

Third,  he  may  have  actually  miscounted  the 
bills  or  coins.  This  is  purely  a  mechanical  error 
which  is  quickly  discovered  by  the  experienced 
teller. 

We  have  spoken  earlier  in  the  chapter  of  the 


THE  RECEIVING  TELLER  71 

errors  of  addition  in  deposit  slips,  and  mistakes 
in  entering  items  on  deposit  slips. 

Transposition  of  figures,  which  is  easily  enough 
made,  is  occasionally  a  source  of  annoyance. 
However,  the  teller  has  a  venerable  idea  regard- 
ing transpositions,  handed  down  from  generation 
to  generation  of  bookkeepers,  which  serves  fre- 
quently to  locate  this  sort  of  discrepancy.  If  the 
difference  (the  shortage  or  overage)  is  divisible 
by  nine,  then  a  transposition  is  possible.  So  when 
he  discovers  that  his  difference  can  be  divided  by 
that  number,  he  immediately  suspects  a  transposi- 
tion, and  sets  to  work  to  check  his  deposit  slips 
with  his  lists  of  checks. 

Our  teller,  being  a  good  one,  is  not  without 
resource  if  he  is  out  of  balance.  Often,  stopping 
to  think  clearly  for  a  moment,  it  comes  to  him 
like  a  flash  that  he  has  failed  to  credit  the  indi- 
vidual books  with  a  check  that  was  missorted  and 
which  was  charged  to  them,  or  that  he  has  not 
credited  himself  with  some  change  in  packages 
which  he  has  that  day  furnished  the  paying  teller. 
Sometimes  he  will  be  looking  over  his  deposit 
slips,  when  out  of  balance,  and  suddenly  get  the 
impression  very  vividly  that  a  certain  check  is 
listed  incorrectly  on  such  and  such  a  ticket.  Look- 
ing it  up,  he  finds  his  impression  correct.  Occa- 
sionally he  remembers  that  he  changed  the  figures 
on  a  certain  ticket  that  morning  to  agree  with  his 
computation.  He  calls  up  the  depositor,  inquires 
about  it,  and  quite  often  discovers  his  difference. 
Then,  too,  there  remain  all  the  ways  of  checking 
back  items  with  lists  and  tickets. 

After  a  day  as  strenuous  as  we  have  described. 


72  PRACTICAL  BANKING 

one  may  easily  picture  our  ideal  teller  lying  down 
to  sleep  the  ideal  sleep  of  the  weary.  Of  course, 
no  clerk  could  well  experience  such  a  vicissitudin- 
ous  day,  as  we  have  mentioned  most  of  the  possi- 
ble problems  which  might  arise  in  the  ordinary, 
day-in-and-day-out  performance  of  his  duties. 


CHAPTER  VII 


THE  LOAN  AND   DISCOUNT  DEPARTMENT 

A  bank  is  a  manufactory  of  credit  and  a  machine  of  exchange. 

Horace  White. 


Next  to  depositing  and  checking,  there  is  prob- 
ably no  feature  of  banking  more  familiar  to  the 
public  than  the  lending  of  credit.  In  the  course  of 
his  life  nearly  every  man  has  occasion  to  borrow 
from  a  bank.  Many  persons  are  inclined  to  tra- 
duce the  usefulness  of  the  bank  as  a  lending 
agency.  Yet  it  has  been  the  means  of  more  prog- 
ress, of  making  more  comforts  the  property  of  all, 
of  more  civilization,  probably,  than  any  other 
institution  of  modern  times. 

The  lending  of  money  or  credit  is  essentially 
the  most  vital  function  of  banking.  "The  Loan 
Department  is  not  only  the  most  important,  but 
it  is  the  money-making  end  of  the  business.  If 
it  makes  no  loans,  it  will  pay  no  dividends.  If,  on 
the  other  hand,  it  makes  bad  loans,  it  will  go  out 
of  existence."  ^  Not  only  is  it  the  money-making 
side  of  the  bank,  but  it  is  a  source  of  deposits. 
In  the  first  chapter  we  have  quoted  Mr.  Vander- 
lip  to  show  that  banks  do  not  first  gather  deposits 
in  order  to  lend,  but  extend  loans,  thereby  creat- 
ing  deposits.     Probably   the   relation   of   bank 

•  Humphrey  Robinson,  A  Simple  Explanation  of  Modern  Bank' 
ing.  p.  82. 


74  PRACTICAL  BANKING 

deposits  from  credit  sources  —  i.e.,  loans  and 
discounts  —  to  cash  money  deposits  is  as  high 
as  5  to  1. 

Regarding  the  creation  of  deposits  by  discount- 
ing, Mr.  Horace  White,  in  his  work  on  Money  and 
Banking,  has  in  part  quoted  Mr.  H.  D.  McLeod 
as  follows :  — 

He  —  the  banker  —  now  begins  to  discount  the 
commercial  paper  of  his  customers  running  say  ninety 
days  at  six  per  cent.  When  he  discounts  a  bill  of  ex- 
change for  $1000,  he  deducts  the  interest  for  ninety 
days  ($15)  and  credits  the  customer  with  the  remainder 
($985)  on  his  books.  This  $985  is  called  a  deposit,  be- 
cause the  customer  has  the  right  to  draw  it  out  by  his 
check  exactly  as  he  could  draw  out  an  equal  sum  of 
gold  deposited  by  him  in  the  same  bank.  In  the  eye  of 
the  banker,  and  of  the  customer,  and  of  the  law,  it  is  a 
deposit.  In  ordinary'  times  it  is  like  any  other  deposit. 
That  is,  the  proportion  remaining  uncalled  for  at  any 
time  will  be  about  the  same  as  the  proportion  of  actual 
money  deposited.  Yet  it  is  nothing  but  a  bank  credit. 
Hence  the  word  "deposit,"  when  thus  used,  is  clearly 
a  misnomer,  since,  by  derivation  and  common  under- 
standing, a  deposit  means  a  thing  laid  away,  or  given 
in  charge  of  somebody. 

Thus,  it  can  be  clearly  inferred  that  the  pro- 
ceeds of  a  very  small  fraction  of  the  average 
bank's  loans  and  discounts  are  paid  in  cash.  The 
author  has  one  bank  in  mind  which,  according  to 
an  official,  never  pays  any  cash  on  paper,  and  but 
rarely  issues  cashier's  checks  for  the  proceeds  of 
a  note.  When  arrangements  are  made  with  a  bank 
for  credit,  the  customer  nearly  always  agrees  to 
keep  a  certain  deposit  balance  on  the  books. 


LOAN  AND  DISCOUNT  DEPARTMENT    75 

Assume  that  a  man  wishes  to  open  a  credit  at 
a  certain  bank.  He  arms  himself  with  whatever 
collateral  or  evidences  of  debt  due  him  he  may 
de»ire  to  offer,  and  repairs  to  the  bank.  There  he 
must  conform  to  one  of  two  methods  of  proced- 
ure. Either  his  application  will  be  considered  by 
the  board  of  directors  or  by  certain  officers  of  the 
bank.  In  the  latter  event  those  having  the  power 
of  extending  credit  to  a  new  customer  are  the 
president,  vice-president,  or  the  cashier  —  per- 
haps all  three.  Some  institutions  permit  certain 
clerks  to  discount  paper  for  those  having  an 
established  line  of  credit,  but  generally  speaking, 
no  person,  unless  he  is  an  officer,  has  the  power  of 
extending  the  bank's  credit. 

Now  our  man,  who  has  made  application  for  a 
credit,  has  submitted  either  his  collateral  or  notes 
which  he  wishes  to  discount.  If  he  wishes  a  credit 
of  say  $100,000,  the  bank  may  require  an  average 
balance  of  $10,000  to  $20,000.  Mr.  Humphrey 
Robinson,  in  his  book  on  the  modern  bank,  says, 
"In  New  York  the  banks  generally  require  a 
regular  customer  to  keep  an  average  balance  of 
not  less  than  twenty  per  cent  of  the  loans  made 
him.  Most  interior  banks  consider  ten  per  cent 
about  the  right  proportion."  For  his  own  notes 
the  customer  probably  pledges  security.  His 
indorsement  on  receivables  (i.e.,  the  obligations 
of  others  in  his  favor)  is  sufficient.  When  the 
amount  of  credit,  the  rate  of  interest,  and  the 
security  have  been  agreed  upon,  the  paper  is 
turned  over  to  the  discount  clerk,  who  figures  the 
interest  or  discount,  takes  the  paper  in,  and  has 
the  proceeds  credited  to  the  new  customer's  ac- 


76  PRACTICAL  BANKING 

count.  From  time  to  time  the  customer  proba- 
bly has  commercial  paper  discounted  for  the 
credit  of  his  account.  He  is  free  to  make 
as  many  drafts  against  his  bank  credit  as  he 
pleases,  provided  his  average  balance  is  that 
agreed  upon. 

The  extension  of  a  bank's  credit  on  time  loans 
is  based  largely  on  commercial  paper.  ^  In  fact, 
probably  two  thirds  of  the  credit  in  our  country  is 
based  on  commercial  paper.  When  a  security 
loan  is  made  it  is  customary  to  require  about 
twenty  per  cent  more  collateral  than  the  amount 
of  the  loan.  If,  however,  the  security  be  of  the 
very  best  grade,  no  excess  may  be  required.  On 
the  other  hand,  if  the  security,  such  as  real  estate, 
is  not  easily  and  quickly  convertible,  a  larger  per- 
centage is  required.  National  banks,  of  course, 
may  not  accept  real  estate  mortgages  as  security 
for  any  loan  at  the  time  of  making.  To  prevent 
loss,  they  may  afterward  accept  such  for  loans 
made  in  good  faith. 

Bonds  of  all  kinds,  stocks,  mortgages  on  real 
estate  and  on  personal  property,  and  private 
obligations  of  other  kinds,  are  deemed  legitimate 
and  acceptable  collateral.  In  accepting  stocks 
for  collateral,  it  is  important  to  see  that  they  are 
properly  indorsed  with  the  power  of  attorney  to 
transfer  their  title  on  the  stock  ledger  of  the  issu- 
ing corporation. 

The  rate  of  interest  on  loans  and  discounts 
varies  from  two  to  eight  per  cent.  A  maximum 
rate  is  fixed  by  statute  in  nearly  all  the  States. 
National  banks  in  places  where  the  rate  is  regu- 

*  See  page  23,  note,  and  the  chapter  on  the  Federal  Reserve  Act. 


LOAN  AND  DISCOUNT  DEPARTMENT    77 

lated  by  the  State  may  charge  legal  interest;  in 
States  where  it  is  not  specifically  fixed,  they  may 
charge  seven  per  cent  and  no  more.  Yet  the  rate 
is  constantly  fluctuating  as  the  ratio  of  supply 
to  demand  changes.  From  the  Financial  Age  of 
July  18,  1910,  the  following  report  of  the  New 
York  money  market  is  taken :  — 

The  feature  of  the  week  has  been  an  extensive  in- 
quiry for  six  months'  accommodation.  Lenders  can 
now  obtain  5j  per  cent,  and  even  at  this  rate  the 
supply  is  not  abundant.  Higher  charges  are  levied  for 
all  periods,  although  sixty  day  money  is  occasionally 
available  at  3^  per  cent.  The  detailed  range  at  the 
close  of  the  week  was  as  follows:  Sixty  days,  3|  per 
cent;  90  days,  4j  to  4|  per  cent;  four  months,  4^  to 
4|  per  cent;  five  months,  4f  to  5  per  cent;  and  for  six 
months  5j  per  cent.  The  maximum  quotation  on  call 
for  the  week  was  3  per  cent.  The  average  ruling  rate 
for  the  week  has  been  a  shade  over  2|  per  cent,  the 
minimum  2  per  cent. 

The  rate  for  call  money,  in  New  York  espe- 
cially, fluctuates  even  from  hour  to  hour.  This 
is  because  there  is  no  definite  supply  or  constant 
demand,  for  the  call  money  market  consists 
largely  of  the  overage  of  banks  on  the  one  hand 
and  the  shortage  of  brokers  on  the  other.  The 
necessity  for  such  investment  is  felt  to  a  very 
great  degree  in  New  York,  where  all  clearing- 
house banks  are  required  to  carry  a  cash  balance 
on  hand  equal  to  twenty-five  per  cent  of  their 
deposits.  They  do  not  normally  carry  much  if  any 
more  than  this,  and  so  a  debit  of  a  million  or  more 
dollars  in  the  clearing  would  probably  seriously 
affect  their  reserve.   They  must  call  in.    But  on 


78  PRACTICAL  BANKING 

the  other  hand,  if  they  have  a  large  credit  in  the 
clearing,  they  find  it  very  undesirable  to  coop  it 
up  inactive  in  their  vaults,  and  consequently 
they  invest  it  in  call  loans.  They  usually  are  able 
to  invest  it  in  this  manner,  since  brokers  are  con- 
stantly needing  large  sums  of  money  for  short 
time. 

It  has  been  argued  by  some  people  that  banks 
doing  a  business  of  discounting  small  notes  almost 
exclusively  and  paying  many  of  them  in  cash, 
should  be  permitted  to  charge  one  per  cent  per 
month.  It  is  shown  that  it  requires  as  much  time 
and  space  to  accept  and  keep  a  fifty-dollar  loan 
as  one  of  one  thousand  dollars. 

The  period  of  the  average  time  loan  is  probably 
ninety  days.  Four  months'  paper  is  also  much  in 
evidence;  five  and  six  months'  paper  is  rarer;  and 
long-time  paper  is  seldom  seen  in  a  commercial 
bank,  beyond  a  small  block  which  may  be  safely 
invested  to  offset  somewhat  the  loss  incurred  by 
the  bank's  entire  credit  not  being  extended  at 
certain  times. 

When  a  note  is  made  payable  at  a  fixed  date, 
it  is  customary  in  most  instances  to  deduct  for 
the  exact  number  of  days  from  the  day  of  dis- 
count to  the  day  of  maturity.  In  some  States  the 
banks  are  permitted  to  charge  interest  for  the  day 
of  discount  as  well  as  the  day  of  maturity.  The 
three-days-of -grace  rule  still  exists  in  some  of  the 
States,  though  its  usefulness  has  long  since  passed. 
Interest  is  charged  for  days  of  grace. 

For  computing  the  day  on  which  a  note  falls 
due  at  so  many  days  from  date,  charts  are  used. 
These  charts  likewise  show  the  number  of  days 


LOAN  AND  DISCOUNT  DEPARTMENT    79 

between  two  dates,  making  allowance  for  a  holi- 
day if  the  note  matures  on  one.  Reference  to  a 
book  in  which  interest  is  figured  at  different  rates 
for  any  length  of  time  on  any  amount  saves  time 
and  insures  accuracy.  The  reduction  of  the  dis- 
count clerk's  work  in  this  particular  to  a  purely 
mechanical  process  is  certainly  a  reduction  of 
error. 

Some  note  forms  contain  clauses  in  which  the 
signer  waives  all  exemption  from  debt  as  pro- 
vided by  law,  and  agrees  to  the  confiscation  of 
any  of  his  property  which  the  bank  may  hold  if 
he  defaults  in  the  payment  of  the  note  at  ma- 
turity ;  in  these  notes  he  also  assents  to  the  forced 
collection  of  the  paper,  in  default  of  payment,  by 
an  attorney,  whose  fee  he  agrees  to  pay.  In  addi- 
tion, the  collateral  notes  provide,  in  his  failure  to 
pay,  for  the  sale  of  the  securities,  the  proceeds  of 
which  may  be  applied  to  the  face  of  the  note  and 
accumulated  interest.  If  there  is  anything  left, 
it  is  paid  to  the  former  owner  of  the  securities  or 
his  personal  representative,  appointed  in  his  will 
or  by  the  law.  A  banker  may  demand  more  or 
other  security  at  any  time  if  he  thinks  that  which 
he  holds  is  declining  in  value,  and  upon  the  bor- 
rower's refusal  to  comply  he  may  even  sell  it. 

All  discounted  notes  are  indorsed.  Frequently 
in  this  class  of  paper,  it  is  desirable  for  the  in- 
dorser  to  waive  protest  on  the  note.  Why  this 
is  so  will  now  be  shown.  Many  a  bank  customer 
discounts  the  note  of  a  man  that  he  knows  is  per- 
fectly good  for  the  amount.  But  there  is  a  possi- 
bility that  he  may  not  be  able  to  meet  his  obliga- 
tion on  the  day  of  its  maturity.  Now,  if  the  signer 


80  PRACTICAL  BANKING 

is  a  good  patron  of  the  bank  customer,  it  would 
not  be  good  policy  to  have  the  note  protested,  for 
even  if  such  action  caused  immediate  payment  of 
the  debt,  it  probably  would  incur  the  lasting 
enmity  of  the  patron ;  if  it  did  not  cause  the  pay- 
ment of  the  paper,  the  customer  would  be  liable, 
not  only  for  the  note,  but  also  for  the  protest  fees. 
So  in  a  large  number  of  cases,  commercial  paper 
is  taken  nonprotestable. 

Primarily,  of  course,  the  maker  of  a  note  is 
responsible  for  its  payment,  but  in  his  default 
each  indorser  is  responsible  for  a  part  or  all  of  the 
note. 

It  must  be  remembered  that  these  provisions 
are  not  necessarily  universally  observed.  For 
instance,  it  is  not  the  custom  in  the  Eastern 
States  for  notes  to  contain  clauses  as  to  waiver 
or  attorneys'  fees. 

II 

In  keeping  record  of  their  notes,  banks  have 
different  systems.  The  general  bookkeeper  has 
the  loan  and  discount  account  on  his  ledger.  With 
this  account  the  notes  themselves  are  balanced 
every  so  often.  For  ready  reference  many  banks 
use  two  books  which  we  shall  call  a  register  and 
a  ledger. 

The  register  is  a  sort  of  journal,  showing  in 
detail  each  day's  loans  and  discounts.  Columns 
are  ruled  off  for  the  number  of  the  paper,  the 
maker,  the  indorsers,  the  date  of  making,  the 
date  of  discount,  the  amount,  the  discount  or 
interest,  and  any  general  remarks.  This  last 
column  may  include  such  information  as  whether 


LOAN  AND  DISCOUNT  DEPARTMENT    81 

the  note  is  secured  by  collateral  or  not,  whether 
the  note  is  a  renewal,  and  whether  the  signer  has 
in  the  past  been  prompt  in  liquidating  his  in- 
debtedness. 

The  ledger  is  a  book  which,  like  any  other 
ledger,  has  a  sheet  or  space  for  each  customer. 
On  these  sheets  are  entered  the  notes  as  they  are 
taken.  The  ruling  is  similar  to  that  of  the  reg- 
ister. 

The  notes  are  entered  on  these  books  and  then 
filed  away  till  maturity.  Banks  usually  file  their 
notes  alphabetically,  or,  as  seems  more  conven- 
ient, by  the  date  of  their  maturity. 

It  is  a  good  plan  to  get  out  a  month's  notes, 
say  ten  days  before  the  first  one  matures.  No- 
tices are  sent  to  the  makers  of  these  notes  a  week 
or  ten  days  before  they  fall  due. 

At  the  time  the  ensuing  month's  notes  are 
taken  out  of  the  file,  it  has  been  found  desirable 
to  enter  them  on  a  book  called  the  "tickler," 
according  to  the  dates  of  maturity.  This  book 
need  only  show  the  date  due,  the  maker's  name, 
and  the  amount.  It  is  very  handy  in  making 
records  of  notes  paid  and  renewed.  A  sufficient 
amount  of  data  can  be  set  down  in  the  latter  case 
to  show  the  number  of  times  renewed  and  the 
date  of  the  original  loan.  Thus  the  tickler  can  be 
used  as  a  quick-reference  book,  saving  the  neces- 
sity of  looking  up  the  note.  It  is  also  well  adapted 
for  making  monthly,  semiannual,  or  annual  re- 
capitulations of  just  what  percentage  of  loans  and 
discounts  has  been  paid,  renewed,  and  unpaid. 
In  many  banks,  however,  this  tickler  is  not  run 
up  once  a  month,  but  daily.    In  this  case  the 


82  PRACTICAL  BANKING 

notes  are  entered  on  the  day  that  they  come  into 
the  bank. 

It  may  seem  that  some  of  these  books  are  use- 
less, but  such  a  number  has  proved  very  conven- 
ient in  many  cases.  Some  banks  use  more.  The 
writer  knows  of  one  bank,  for  instance,  that  seeks 
to  have  at  least  three  checks  on  all  its  work.  Since 
the  bank  clerk  is  made  of  the  same  fallible  dust 
as  everybody  else,  he  will  make  mistakes,  be  he 
ever  so  accurate.  It  is  unlikely,  however,  that  the 
same  error  will  be  made  on  two  books,  and  for 
many  practical  purposes  the  books  mentioned 
above  will  act  as  checks  on  each  other. 

Ill 

Although  nearly  all  banks  of  any  considerable 
size  provide  separate  departments  for  the  receipt 
and  the  collection  of  loans  and  discounts,  this 
chapter  purports  to  cover  both  under  the  single 
title.  They  are  closely  allied,  have  many  points 
in  common,  and  therefore  it  is  quite  feasible  to 
treat  them  together. 

When  the  notes  fall  due,  the  bank's  business  is 
to  collect  them.  There  is  nothing  which  so  elo- 
quently attests  to  loose  management  in  a  bank 
as  a  great  stack  of  past-due  notes,  uncollected 
because  of  the  lack  of  suflBciently  energetic  efforts. 
There  is  nothing  which  the  bank  examiner  so 
vigorously  insists  upon  as  that  overdue  paper  held 
an  unreasonable  time  be  charged  to  "profit  and 
loss,"  and  that  collection,  if  desired,  be  pushed 
through  other  channels. 

Many  notes  are  made  payable  in  some  other  city 
than  that  where  they  are  discounted.   They  are 


/ 


LOAN  AND  DISCOUNT  DEPARTMENT    83 

forwarded  some  time  before  maturity  to  a  bank 
in  that  city.  That  bank  collects  them,  if  it  can, 
and  remits  with  a  check  on  a  par  city,  usually 
deducting  exchange  and  collection  charges.  This 
method  of  collection  will  be  more  fully  discussed 
in  a  subsequent  chapter. 

It  is  frequently  necessary  to  turn  over  a  paper 
to  an  attorney  to  collect  through  the  courts.  He 
is  authorized  to  bring  suit  on  behalf  of  the  bank 
and  to  obtain  judgment  for  his  fee  as  well  as  for 
the  debt. 

If  a  protestable  note  is  not  paid  on  the  day  of 
its  maturity,  it  must  be  protested  for  nonpayment 
by  a  notary,  unless  it  mature  on  a  holiday  or  a 
half-holiday,  when  it  is  due  and  payable  on  the 
following  business  day.  Failure  to  protest  a  note 
makes  the  bank  liable  for  its  amount,  but  protest 
where  it  is  waived  makes  the  bank  liable  only  for 
the  notary's  fees,  although  it  might  lead  to  trouble 
with  the  indorser  or  maker.  Ordinarily,  if  protest 
has  been  made  in  due  form,  the  fees  must  be  paid 
by  the  maker,  or,  if  he  default,  by  the  indorser. 


CHAPTER  VIII 

THE  FOREIGN  CASH  ITEMS  OR  TRANSIT 
DEPARTMENT 

In  every  bank  there  are  certain  facilities  for 
handling  foreign  cash  items  and  in  a  large  bank 
there  is  a  regular,  well-organized  department 
with  its  head  and  its  corps  of  workers.  There  may 
be  one  or  two  clerks,  or  there  may  be  a  dozen  in 
the  department,  depending  on  the  volume  of  for- 
eign business  handled.  In  a  huge  bank  of  the 
metropolis,  twenty  thousand  or  more  checks  are 
daily  run  through  this  department.  It  is  neces- 
sary to  keep  a  night  shift  in  some  of  the  greatest 
institutions  to  open  mail  and  "run  off"  the  in- 
coming checks  on  the  adding-machine. 

Foreign  checks,  as  referred  to  here,  are  usually 
those  drawn  against  banks  situated  in  places 
other  than  the  one  where  the  collecting  bank  is 
located.  The  line  which  defines  them  most  fully 
seems  to  be,  "checks  that  are  collected  by  mail, 
but  not  on  foreign  countries."  Checks  on  foreign 
countries  are  handled  through  the  "foreign  de- 
partment," and  will  be  discussed  in  a  subsequent 
chapter. 

Most  people  have  only  a  vague  idea  of  the  exist- 
ence of  the  department  under  consideration,  and 
many  never  dream  of  it,  dismissing  all  thought  of 
how  a  foreign  check  is  collected  the  moment  they 
pass  it  over  the  counter  of  the  bank.  Few,  in- 
deed, realize  the  actual  importance  of  the  transit 


TRANSIT  DEPARTMENT  85 

department  —  how  it  is  skillfully  manipulated 
to  throw  balances  first  in  one  locality,  then  in 
another;  how  it  is  operated  to  curtail  the  heavy 
expense  of  domestic  exchange;  how  it  is  used  as 
the  instrument  of  getting  accommodation  and 
courtesies  otherwise  unobtainable. 

Suppose,  now,  that  in  a  bank  taking  in  through 
its  windows  alone  a  thousand  foreign  checks  daily, 
drawn  probably  on  two  hundred  banks,  an  at- 
tempt should  be  made  to  send  out  each  check  to 
the  bank  on  which  it  was  drawn.  The  exchange 
would  be  more  than  doubled,  as  banks  generally 
charge  as  much  to  collect  a  single  check  of  five 
dollars  as  one  of  twenty-five  dollars.  Then  there 
would  not  be  half  the  efficiency  and  celerity  in 
getting  returns,  as  the  bank  does  not  hurry  as 
much  to  accommodate  an  occasional  customer  as 
one  sending  many  checks  daily. 

Further,  in  many  cities  and  towns  a  bank  could 
get  a  reduced  exchange  rate  or  even  a  par  ar- 
rangement by  throwing  all  its  checks  for  a  certain 
territory  into  one  association;  at  least,  it  could 
be  done  by  carrying  an  account  in  the  association 
in  addition  to  allowing  it  the  collecting  privilege 
for  a  certain  area.  The  clearing  houses  of  many 
cities,  however,  prohibit  any  special  exchange 
arrangements  and  establish  a  uniform  rate  to  be 
charged  by  all  its  members.  These  provisions  of 
the  clearing  house,  moreover,  are  usually  en- 
forced by  the  attachment  of  a  heavy  penalty  for 
their  violation.  For  example,  the  New  York 
Clearing  House  Association  imposes  a  fine  of 
five  thousand  dollars  upon  a  member  for  the 
first   violation   of   its  exchange   rules,  and   pro- 


86  PRACTICAL  BANKING 

vides  for  the  forfeiture  of  membership  on  second 
offense. . 

These  foreign  cash  items  come  from  many 
sources:  from  the  paying  teller  who  cashes  them; 
from  the  receiving  teller  who  accepts  them  as  de- 
posits; from  the  note  department  in  payment  of 
notes  and  drafts;  from  banks  depositing  them  or 
sending  them  for  collection. 

Generally  it  is  found  wise  to  collect  these  items 
two  or  three  times  daily  from  the  several  depart- 
ments, making  an  adding-machine  list  of  each 
package  to  turn  over  to  the  appropriate  teller. 
The  checks  thus  collected  are  "run  in"  with  any 
foreign  checks  which  may  have  been  held  over 
from  the  last  emission  and  assorted  into  pigeon- 
holes or  files,  which  divide  them  conveniently  for 
routeing. 

These  items  are  usually  divided  into  two  parts: 
namely,  those  sent  for  "returns,"  and  those  sent 
for  "credit."  By  "returns"  is  meant  that  the 
bank  which  receives  them  shall  collect  and  return 
a  draft  for  the  amount,  minus  exchange  charges. 
These  return  drafts,  as  a  rule,  are  on  New  York, 
Chicago,  or  some  city  whose  exchange  is  accepted 
at  par.  By  "credit"  is  meant  that  the  proceeds 
of  the  collected  checks  —  deducting  exchange,  if 
there  be  any  charged  —  are  to  be  credited  to  the 
account  of  the  sending  bank. 

Now,  having  collected  into  a  separate  package 
the  checks  to  be  sent  to  each  bank,  the  clerks  sit 
down  to  write.  The  letters  are  printed  duplicate 
forms  with  instructions  at  the  head,  stating 
whether  they  are  sent  for  returns  or  credit,  that 
for  a  certain  amount  dishonor  of  the  items  is  to  be 


TRANSIT  DEPARTMENT  87 

wired,  and  that  under  specified  conditions  items 
are  to  be  protested.  Below  on  the  blank  space 
each  check  inclosed  is  fully  described,  the  name 
of  the  bank  on  which  it  is  drawn,  the  maker,  or, 
most  usually,  the  last  indorser,  and  the  amount  of 
the  item  being  given.  Many  banks  still  use  the 
old  method  of  writing  these  letters  with  pencil, 
but  most  up-to-date  institutions  use  machines, 
having  the  essential  advantages  both'  of  the  type- 
writer and  the  adding-machine.  By  means  of 
these  the  letters  are  quickly  and  neatly  written 
and  footed  up.  Some  write  their  letters  on  the 
plain  typewriter  and  sum  the  amounts  on  an 
adding-machine. 

When  the  letters  are  written,  it  remains  to 
prove  them.  Very  apparently  the  amount  of 
checks  held  over  from  the  last  balance  added  to 
the  amount  of  the  checks  collected  should  equal 
the  amount  of  the  letters  plus  the  present  hold- 
over. The  matter  of  balancing  may  become,  in 
some  instances,  a  very  difficult  matter,  especially 
if  the  clerks  do  not  keep  their  eyes  open  and  their 
wits  alert,  for  figures  on  bank  checks,  contrary  to 
the  desideratum,  are  not  always  very  legible.  At 
least,  they  are  frequently  ambiguous  to  such  an 
extent  that  an  error  is  quite  easy. 

After  the  balance,  the  checks  are  all  indorsed 
with  the  bank  stamp.  Then  the  original  letters, 
with  items  inclosed,  are  mailed  to  their  respective 
destinations,  but  the  duplicates  are  put  on  file 
for  record,  the  returns  being  carefully  separated 
from  the  credits.  To  insure  record  of  these  checks 
out  for  collection,  the  amount  sent  to  each  bank 
is  also  entered  on  a  sheet  or  book,  the  reverse 


88  PRACTICAL  BANKING 

side  of  which  is  often  used  to  record  remittances 
on  letters  sent  for  returns. 

There  is  another  side  of  this  department  not 
yet  mentioned,  namely,  the  receiving  of  remit- 
tances. The  returns  should  be  demanded  in  a 
reasonable  time.  It  is  rare  that  banks  are  not 
prompt  in  remitting  for  items  sent  them,  as  they 
are  usually  glad  to  get  the  business,  but  occasion- 
ally there  will  be  only  one  bank  in  a  small  town, 
and  if  facilities  are  poor  for  handling  its  checks 
except  through  it  directly,  one  must  "pamper  it 
mightily,"  or  it  will  let  one's  items  be  unremitted 
for  during  week  after  week.  In  many  cases  it  has 
been  expedient,  though  not  on  the  whole  desir- 
able, to  use  the  express  companies  to  collect  such 
checks.  These  little  banks  become  very  irate  if, 
in  order  to  get  better  service,  resort  is  had  to  the 
express  company  for  collection.  In  one  particular 
case,  for  instance,  it  is  related  that  the  bank  paid 
one  of  the  checks  thus  presented  to  it  in  coin 
entirely,  putting  the  limit  of  small  coin  in  the  bag, 
and  covering  the  whole  with  a  liberal  coat  of 
molasses.  But  this  sort  of  petty  spite  is  rare,  as 
it  is  not  conducive  to  advantage,  but  leads  to 
certain  detriment.  It  behooves  the  clerk  in  charge 
of  the  transit  department  to  keep  an  eye  vigilant 
to  see  that  remittances  and  credits  are  made 
promptly.  If  there  appears  to  be  any  unwarrant- 
able delay,  he  sends  a  tracer  asking  why  advice 
has  not  been  forwarded  on  the  items  mailed. 

As  fast  as  the  drafts  come  in  for  return  letters, 
the  duplicates  which  they  represent  are  taken  off 
the  current  file  and  placed  on  the  permanent  file. 
The  amount  of  each  letter  is  entered  on  a  sheet 


TRANSIT  DEPARTMENT  89 

for  the  purpose,  sometimes  the  reverse  of  the 
sheet  on  which  the  outgoing  letters  are  entered. 
At  the  side  there  is  a  cokimn  in  which  can  be  put 
the  amount  of  exchange  charged  in  each  instance. 

The  drafts  thus  received  in  payment  of  items 
sent  to  be  collected  are  drawn  on  New  York, 
Chicago,  or  some  par  city. 

Often,  however,  checks  sent  out  are  unpaid 
for  one  reason  or  another,  and  are  consequently 
returned.  In  this  case  the  remittance  is  relatively 
smaller.  These  unpaid,  returned  checks  are 
charged  back  to  the  account  of  the  bank,  firm,  or 
individual  which  deposited  them. 

Usually  checks  are  sent  protestable,  and  if  un- 
paid are  to  be  duly  presented  by  a  notary  and 
protested.  A  failure  to  protest,  when  ordered, 
renders  the  offending  bank  liable  for  the  amount 
of  the  check.  If  the  bank  sending  a  check  pro- 
testable  has  no  account,  the  protester  can  only 
write  and  request  a  remittance  to  cover  the  fees. 
He  may  be  able  to  compel  the  payment  of  fees, 
but,  as  a  matter  of  practice,  these  fees  are  usually 
most  promptly  paid.  In  the  case  where  the  check 
was  deposited,  it  is  easy  to  charge  it  and  the  pro- 
test fees  to  the  account. 

In  the  matter  of  exchange  charges,  the  clerk  in 
charge  of  this  department  has  an  excellent  oppor- 
tunity, if  he  keeps  his  eyes  open,  to  save  the  bank 
money.  Many  little  banks  take  delight  in  charg- 
ing exorbitant  exchange  rates  if  they  are  suffered 
to  do  so  with  impunity.  However,  a  letter  re- 
questing the  refund  of  excess  charges  for  exchange 
is  usually  a  sufiicient  reminder  to  discourage  for 
some  time  any  attempts  to  overcharge.  This  may 


90  PRACTICAL  BANKING 

appear  a  small  item,  but  if  there  are  a  dozen  banks 
overcharging  five  cents  per  hundred  dollars  for 
three  hundred  days  in  the  year,  the  bank's  loss 
from  this  source  alone  may  soon  creep  up  to  an 
appreciable  figure. 

Items  sent  for  the  credit  of  a  bank's  account 
are  handled  a  little  differently.  As  soon  as  they 
are  mailed,  they  are  charged  on  the  reciprocal  or 
bank  ledger  to  the  institution  to  which  they  were 
sent.  The  duplicate  letters  are  kept  on  a  current 
file  until  advice  is  received  that  the  items  have 
been  credited.  They  are  then  transferred  to 
permanent  files. 


CHAPTER  IX 

THE  COLLECTION  DEPARTMENT 

As  one  naturally  infers  from  its  name,  the  col- 
lection department  is  that  division  which  collects 
drafts,  checks,  notes,  and  other  instruments  left 
with  it  or  sent  to  it.  It  must  not,  however,  be 
confused  with  the  transit  department  which  col- 
lects items  sent  as  cash.  The  collection  depart- 
ment is  operated  for  the  accommodation  of  banks 
and  other  customers.  Yet  it  would  not  be  quite 
accurate  to  say  that  it  was  operated  purely  for 
accommodation.  There  is  much  advantage  for 
the  bank  to  derive  from  it;  reciprocal  favors  of 
banks  elsewhere,  the  patronage  of  companies  and 
individuals,  and  collection  charges. 

Without  the  collection  department,  the  hand- 
ling of  items,  on  out-of-town  parties  especially, 
would  indeed  be  awkward.  Drafts,  notes,  checks, 
- —  not  sent  in  cash  letters,  —  etc.,  would  have  to 
be  collected  in  one  of  two  ways :  by  personal  agent 
in  the  town  of  the  drawee,  or  by  "putting  them 
through"  the  transit  department  as  cash  items. 
But  to  secure  a  special  agent  in  each  case  would  be 
impracticable,  though  no  more  so  than  to  send 
them  as  cash  items,  since  there  is  express  desire 
neither  to  have  them  remitted  for  before  collec- 
tion, as  cash  items  sometimes  are,  nor  to  have 
them  credited  to  the  account  of  the  sender.  They 
are  not  cash,  and  are  not  to  be  treated  as  such. 
Therefore,  the  collection  department  came  into 


92  PRACTICAL  BANKING 

existence  to  handle  just  this  sort  of  business,  but 
it  probably  evolved  after  most  of  the  other  depart- 
ments were  organized.  Now,  items  for  collection 
come  to  this  department  in  two  ways  and  are 
payable  in  two  places.  They  come  from  out-of- 
town  sources,  and  are  payable  either  in  the  city 
or  elsewhere;  and  they  come  from  local  customers, 
and  are  payable  either  in  the  city  or  elsewhere. 
Most  that  come  from  out  of  town  are  payable 
locally,  and  most  that  come  from  local  customers 
are  payable  out  of  town. 

First,  to  take  up  those  items  payable  locally. 
A  vast  number  of  checks  are  sent  for  collection, 
the  proceeds  of  which  are  to  be  remitted  as  in- 
structed. Now,  as  in  the  transit  department, 
because  of  better  exchange  and  collection  arrange- 
ments, items  are  frequently  not  sent  direct  to 
their  destination.  But  direct  connection  has  the 
advantage  of  celerity. 

Checks  are  sent  through  the  collection  depart- 
ment, first,  when  payment  of  them  is  doubtful  and 
the  payees  are  unwilling  to  have  them  credited 
to  their  accounts  before  they  are  collected.  Again 
they  are  sent  by  persons  who  have  no  affiliation 
with  a  bank  by  which  they  can  get  them  cashed 
before  collection  is  effected.  Lastly,  checks,  sent 
as  cash  items  from  out-of-town  banks  but  dis- 
honored for  insufficiency  of  funds,  are  often  sent 
back  for  collection  with  instructions  to  hold  them 
over  for  a  time  in  case  of  nonpayment.  But 
checks  do  not  form  any  large  percentage  of  the 
items  handled  through  this  department. 

Even  more  numerous  than  checks,  in  this  de- 
partment, are  drafts.   As  some  one  has  said,  the 


THE  COLLECTION  DEPARTMENT      93 

distinction  between  a  check  and  a  draft  is  that  one 
is  a  command  to  pay,  while  the  other  is  a  request 
to  pay.  The  indebtedness,  of  which  the  draft  is 
supposed  to  be  evidence,  is  generally  of  three 
sorts:  namely,  (1)  for  goods  delivered;  (2)  for 
goods  deliverable  on  payment  or  acceptance  of 
draft;  (3)  for  services  rendered. 

(1)  Most  drafts  for  goods  delivered  are  made 
payable  on  demand  or  at  sight.  These  terms  are 
identical,  save  in  those  places  where  the  days-of- 
grace  custom  still  holds  forth.  There  the  draft 
"at  sight"  is  payable  three  days  after  sight.  All 
drafts  may  be  sent  with  or  without  exchange.  If 
"with  exchange,"  the  drawee  not  only  pays  the 
face  of  the  draft,  but  the  exchange  charges.  Other- 
wise, the  collecting  clerk  deducts  the  charges  on 
remitting  to  the  sender,  although  there  are  fre- 
quent inter-bank  arrangements  whereby  no  col- 
lection charges  are  made. 

(2)  Drafts  covering  a  shipment  of  goods  with 
bills  of  lading  attached  are  not  always  payable 
at  sight  on  demand,  but  frequently  at  thirty, 
sixty,  or  ninety  days'  sight.  However,  a  discount 
is  sometimes  offered  for  the  payment  of  these 
before  maturity.  Bill-of-lading  drafts,  not  pay- 
able at  sight,  are  presented  by  the  collecting  bank 
for  acceptance,  which  is  the  written  agreement  to 
pay  them  at  maturity.  When  acceptance  is  ob- 
tained, the  bill  of  lading  is  in  many  cases  released, 
and  the  draft,  which  has  become  as  binding  as 
any  form  of  note,  is  filed  away  till  the  day  for  its 
collection.  But  this  is  a  matter  regulated  by 
statute  and  no  absolute  rule  can  be  laid  down. 

(3)  Finally,  there  are  drafts  for  services  rend- 


94  PRACTICAL  BANKING 

ered.  Quite  commonly  agents  and  salesmen  draw 
on  their  employers  for  expenses,  commissions,  and 
salaries.  Usually  these  drafts  are  accompanied  by 
orders  or  itemized  expense  bills.  Not  infrequently, 
also,  an  oflBcer  draws  against  his  company  for 
certain  sums  which  he  has  need  of. 

Notes  are  much  in  evidence,  though  on  the 
whole  not  as  much  as  drafts.  The  notes  handled 
are  easily  arranged  into  four  classes,  as  follows: 

(1)  those   covering   purchases   of   merchandise; 

(2)  those  coming  from  persons  who  will  not  or 
cannot  discount  them;  (3)  those  pledged  as  col- 
lateral; (4)  loans  and  discounts. 

(1)  Many  companies  sell  vast  quantities  of 
merchandise  to  foreign,  that  is,  out-of-town, 
buyers.  Often,  instead  of  a  draft  with  bill  of  lad- 
ing attached,  especially  if  payment  is  divided 
into  several  installments,  a  note  or  a  series  of 
notes  is  signed  for  the  debt.  These  notes  are 
made  payable  in  the  place  wh^re  the  signer  has 
his  business.  The  notes  are  forwarded  for  collec- 
tion to  some  bank  in  the  city  where  they  mature. 
Thus,  if  a  small  merchant  buys  a  cash  register  for 
fifty  dollars,  he  may  have  it  broken  up  into  five 
notes  of  ten  dollars  each,  payable  one  per  month. 
The  bank  to  which  they  are  forwarded  collects 
them  as  they  fall  due  and  remits  the  proceeds  to 
the  sender.  One  may  wonder  why  these  notes  are 
not  discounted,  but  are  sent  direct.  Sometimes 
they  are  discounted,  but  they  are  not  always  de- 
sirable to  banks  on  account  of  their  small  amount. 
Likewise,  the  company  usually  does  not  wish  to 
discount  them,  since,  if  it  carries  on  an  extensive 
business  of  this  kind,  it  finds  it  more  profitable  to 


THE   COLLECTION   DEPARTMENT      95 

hold  the  notes  and  collect  them  independently, 
thus  saving  a  large  discount  bill.  It  all  depends 
upon  whether  they  could  utilize  the  capital  in- 
volved to  such  advantage  that  it  would  amount 
to  more  than  the  discount. 

(2)  Many  people  have  good  reason  for  not  dis- 
counting paper  which  they  hold.  Possibly  they 
do  not  need  the  value  of  it,  and  are  content  to 
wait  till  the  notes  fall  due  and  then  present  them 
through  collection  channels.  On  the  other  hand, 
they  may  not  be  able  to  get  them  discounted 
either  because  of  no  bank  affiliation  or  because 
of  the  poor  character  of  the  paper. 

(3)  Banks  and  others  very  often  accept  notes 
as  collateral.  These  are  transferred  to  the  bank 
or  person  holding  them.  In  case  this  collateral 
matures  before  the  paper  it  secures,  the  possessor 
is  generally  authorized  to  make  the  collection  of 
it,  the  proceeds  to  be  applied  to  the  secured  note. 
A  large  volume  of  this  class  of  collections  is 
handled  by  every  bank. 

(4)  The  most  numerous  class  of  notes  handled 
through  the  collection  department  is  that  which 
covers  the  discounts  of  other  banks.  Every  bank 
takes  a  large  amount  of  paper  maturing  in  other 
cities.  These  are  presented  for  payment  through 
the  collection  department  of  some  bank  in  the 
place  where  they  are  payable.  In  this  particular 
the  collection  department  is  well-nigh  indispens- 
able, as  it  insures  prompt  and  energetic  attention 
to  matters  which  otherwise  would  have  to  go 
through  endless  irregularities. 

Now,  the  last  class  of  items  handled  by  the 
collection  department  consists  of  sundry  other 


96  PRACTICAL  BANKING 

instruments,  on  which  there  is  a  certain  sum  to 
be  paid  before  their  deHvery.  This  includes 
stocks,  bonds,  mortgages,  deeds,  etc.,  to  which 
are  usually  attached  drafts,  calling  for  an  amount 
which  is  the  cost  of  the  stock  or  bonds  with  the 
commission,  the  face  and  interest  of  the  mort- 
gage, or  the  price  of  the  property  which  the  deed 
conveys. 

It  must  be  understood  that  the  collection  de- 
partment not  only  handles  those  items  sent  to  it 
for  collection  locally,  but  that  it  forwards  those, 
payable  elsewhere,  to  the  proper  banks  where 
they  are  handled  in  an  identical  manner. 

When  collection  has  been  made,  it  is  the  duty 
of  the  clerk  to  remit  the  amount  paid  —  minus 
the  exchange  and  collection  charges  —  to  the 
sender  of  the  item.  Of  course,  the  remittance 
should  be  in  such  exchange  that  it  may  be  used 
at  par. 

We  may  conclude  that  the  collection  depart- 
ment is  a  necessary  division  of  the  bank,  organized 
to  facilitate  the  handling  of  instruments  not  sent 
as  cash.  Its  relation  to  the  transit  department  is 
close.  They  use  similar  methods  of  mailing  out 
items  to  be  collected  elsewhere;  both  have  partic- 
ular banks  to  which  they  send  their  letters,  be- 
cause of  favorable  exchange  or  collection  rates. 

In  nearly  every  preceding  chapter,  mention 
has  been  made  of  exchange  and  exchange  rates. 
This  very  essential  and  convenient  feature  of 
the  banking  business  is  the  subject  of  the  next 
chapter. 


CHAPTER  X 

THE  DOMESTIC  EXCHANGE  DEPARTMENT 

This  department  is  operated  for  the  buying 
and  selling  of  exchange  on  different  parts  of  the 
country.  "Exchange"  is  the  term  which  has 
come  to  denote  the  bank's  check  on  some  bank  in 
another  place,  for  which  you  exchange  your 
money  or  your  check.  And  the  name  of  the  city 
prefixed  to  the  word  "exchange"  exposes  the 
city  on  which  the  check  is  drawn,  not  the  one 
which  draws  it.  Thus,  Chicago  exchange  would 
be  a  bank's  check  on  some  bank  in  Chicago. 

Preeminent  among  exchange  cities  of  the  coun- 
try is  New  York.  It  is  the  financial  center  of  the 
United  States.  Wall  Street  —  which  is  really 
only  a  term  that  represents  the  aggregate  finan- 
cial interests  of  the  country  —  controls  the  policy 
of  national  finance.  The  thirty-eight  national 
banks  in  New  York  City,  in  the  year  ending  Sep- 
tember 1,  1909,  made  loans  amounting,  in  round 
figures,  to  $926,000,000,  or  about  twenty  per 
cent  of  all  the  loans  made  by  national  associations 
in  the  United  States. 

New  York's  position  as  a  central  reserve  city 
secures  her  a  vast  amount  of  deposits  from  other 
cities,  for  outside  national  banks  may  carry  from 
one  half  to  three  fifths  of  their  reserve  as  deposit 
balances  in  that  city.^    Practically,  every  bank 

^  See  chapter  xx  for  the  new  reserve  requirements.  In  1914  five 
or  six  great  New  York  banks  held  three  fourths  of  the  reserves 
deposited  in  that  city. 


98  PRACTICAL  BANKING 

in  the  country,  from  the  little  one-clerk  institu- 
tion at  the  forks  of  the  road  to  the  largest  urban 
bank,  carries  an  account  in  New  York.  What 
is  true  of  New  York  is  true  in  a  less  degree  of 
Chicago  and  St.  Louis,  and,  in  a  still  less  degree, 
of  Philadelphia,  Washington,  Boston,  and  San 
Francisco.  But  we  shall  treat  most  specifically 
of  New  York  exchange,  as  it  plays  the  leading  role 
in  this  department. 

In  1912,  Congressman  Vreeland,  of  New  York, 
explained  New  York  City's  importance  as  an 
exchange  city  as  follows :  — 

Under  existing  conditions  the  banks  of  New  York 
are  charged  with  the  responsibility  of  maintaining 
credit  and  of  maintaining  cash  payment  in  the  United 
States.  New  York  holds  the  ultimate  reserves  of  the 
country.  The  surplus  money  of  banks  may  be  de- 
posited in  San  Francisco  or  New  Orleans  or  St.  Louis 
or  Chicago,  but  ultimately  those  not  needed  at  home 
find  their  way  to  the  banks  of  New  York.  This  is  true 
because  New  York  has  the  only  real  call  (loan)  market  in 
the  United  States.^ 

During  the  last  few  years  Washington  has 
assumed  the  proportions  of  an  important  finan- 
cial factor,  through  the  action  of  ex-Secretary 
Cortelyou,  who,  during  the  financial  crisis  of 
1907,  distributed  government  deposits  in  such  a 
way  as  to  strengthen  a  large  number  of  banks 
throughout  the  country.  Some  have  gone  so  far 
as  to  declare  that  this  custom  will  ultimately 

*  From  a  speech  in  the  House  of  Representatives,  February  6, 
1912.  The  next  sentence  should  be  borne  in  mind  in  regard  to  what 
we  shall  see  in  chapters  xix  and  xx:  "It  is  a  real  call  market  nine 
years  out  of  ten,  but  in  the  tenth  year  they  often  call  in  vain." 


DOMESTIC  EXCHANGE  DEPARTMENT    99 

transfer  the  control  of  finances  from  Wall  Street 
to  the  Capitol,  and  they  assert,  in  their  enthusi- 
asm, that  this  will  be  the  end  of  the  "money 
kings'"  czar-like  tyranny  over  our  finance.  But 
they  forget  that  the  Administration  is  already  a 
powerful  factor  in  national  finances,  and  that  it 
can  create,  as  well  as  dispel,  panics.  They  also 
forget  that  there  is  just  the  same  potentiality 
for  the  "money  kings"  controlling  the  situation 
through  Washington  as  through  Wall  Street. 

In  the  very  near  future  there  will  be  a  tendency 
for  national  finances  —  so  far  as  commercial  bank- 
ing is  concerned  —  to  cluster  around  twelve 
centers,  with  a  central  supervision  in  Washington. 
We  refer,  of  course,  to  the  effect  of  the  operation 
of  the  Federal  Reserve  System.^  Nevertheless, 
New  York's  reserve  bank  is  the  largest  and  will 
be  the  most  influential  for  some  time  to  come. 
At  least  for  the  present,  the  nation's  financial 
offices  are  still  located  in  the  shadow  of  old  Trin- 
ity Church  tower. 

Banks  carrying  desirable  accounts  in  New 
York  are  able  to  obtain  interest  on  their  daily 
balances,  usually  two  per  cent.  Thus,  a  bank's 
account  in  New  York  for  a  part  of  its  reserve  is 
a  better  arrangement  than  to  keep  it  all  lying  in- 
active in  its  vaults.  If  judiciously  placed,  these 
funds  are  just  as  safe  ^  as  though  within  one's 
own  safe,  and  almost  as  available,  for  it  is  rare 
that  a  bank  is  not  able  to  dispose  of  a  large  block 

^  See  chapter  xx  for  a  full  discussion  of  the  new  system.  Banking 
practice  regarding  exchange  and  collections  will  be  gradually 
changed;  it  will  require  three  years,  at  the  least,  for  readjustments 
to  be  made. 

*  With  the  exception  cited  in  a  previous  footnote. 


100  PRACTICAL  BANKING 

of  New  York  exchange,  if  not  at  a  premium,  at 
least  at  par. 

But  though  national  banks  carry  a  part  of  their 
reserve  in  New  York  for  the  interest,  what 
further  condition  makes  every  bank,  large  or 
small,  keep  a  certain  volume  of  New  York  funds? 
The  answer:  In  a  country  where  ninety-five  per 
cent  of  all  transactions  are  carried  on  by  check 
and  where  a  large  percentage  of  these  transactions 
are  interurban  and  interstate,  it  is  necessary  to 
have  some  common,  standard  exchange.  From 
the  very  status  rerum.  New  York  exchange  be- 
came the  standard.  In  certain  sections,  Chicago 
and  St.  Louis  exchange  are  also  first  class. 

Being  prime.  New  York  exchange  is  theoreti- 
cally payable  at  par.  But  in  practice  this  is  a 
matter  of  supply  arid  demand.  Sometimes  a  dis- 
count must  be  paid  to  convert  it  into  cash.  This 
is  rare  in  the  case  of  individuals  trying  to  cash 
small  drafts;  but  if  a  hapless  traveler  chances 
to  be  stranded  in  a  village  with  one  bank,  he  will 
probably  be  charged  a  fee  for  negotiating  his 
New  York  check. 

The  discounting  of  New  York  exchange  occurs 
somewhat  more  frequently  in  the  case  of  inter- 
bank transactions.  The  larger  institutions  usually 
take  in  enough  New  York  drafts  from  their  cus- 
tomers to  keep  their  reserve  account  more  than 
replenished.  Consequently,  they  sometimes  wish 
to  dispose  of  a  block  of,  say,  ten  to  fifty  thousand 
dollars  on  New  York  for  cash.  Usually  they  can 
sell  the  exchange  at  par  or  even  at  a  premium. 
On  the  other  hand,  if  the  prospective  pur- 
chaser is  independent  and  the  would-be  seller 


,  DOMESTIC  EXCHANGE  DEPARTMENT    101 

is  anxious  to  get  the  cash,  a  discount  may  be 
exacted. 

There  are  several  sources  of  a  bank's  supply  of 
New  York  exchange,  aside  from  outright  pur- 
chase. First,  for  every  cash  letter  sent  out  for 
returns,  proceeds  are  remitted  in  the  form  of  a 
New  York  draft.  Sometimes  remittances  are  on 
banks  in  other  cities,  but  not  as  a  rule.  Then 
every  bank  has  a  number  of  accounts  of  other 
banks,  carried  for  the  sake  of  special  accommoda- 
tions in  the  matter  of  exchange  charges  or  credit, 
or  even  because  of  reciprocal  accounts.  These 
accounts  are  replenished  by  checks,  frequently 
collectible  in  New  York  exchange  at  par,  or  by 
direct  deposit  of  drafts  on  the  metropolis.  Third, 
every  association  receives  from  its  depositors, 
along  with  other  foreign  checks,  a  large  volume 
of  New  York  drafts.  Added  to  this  is  the  num- 
ber of  checks  on  the  big  city  cashed  through 
the  paying  window  and  received  in  payment  of 
notes,  etc. 

Now,  it  may  be  quickly  seen  what  demands 
are  ordinarily  made  for  New  York  exchange. 
First,  reciprocally  the  bank,  deducting  fees,  must 
remit  for  cash  items,  sent  it  for  collection,  in  the 
standard  exchange.  Second,  it  is  necessary  to 
carry  accounts  with  banks  in  many  places  and 
often  convenient  to  make  deposits  of  exchange. 
Next,  depositing  banks  are  liable  at  any  time  to 
request  the  remittance  of  a  fraction  or  all  of  their 
balance  in  New  York  funds.  Last,  banks  and 
individuals  buy  exchange  constantly. 

The  exchange  department  is  operated  because 
it  is  necessarily  incidental  to  the  conduct  of  the 


102  PKACTICAL  BANKING 

banking  business.  It  is  not  usually  a  money- 
making  branch.  "  It  is  a  fact  that  an  examination 
of  this  account  —  the  exchange  account  —  on  the 
books  of  any  city  bank  almost  invariably  will  show 
that  it  is  a  source  of  loss  rather  than  profit."^ 

Yet,  properly  conducted,  a  large  bank  ought  to 
make  rather  than  lose  on  this  department.  For  it 
takes  in  great  quantities  of  New  York  exchange 
from  its  depositors  —  individual  and  bank.  True, 
it  must  pay  exchange  charges  on  remittances  for 
a  large  volume  of  outgoing  checks,  but  the  very 
volume  of  these  checks  enables  the  bank  to  make 
arrangements  for  cheap  collection.  Then  it  sells 
an  immense  amount  of  exchange  to  its  customers 
at  the  regular  rate. 

On  the  other  hand,  the  small  bank,  unless 
shrewdly  managed,  is  disadvantageously  placed, 
and  stands  to  lose  money.  Usually,  it  cannot 
make  the  profitable  arrangements  for  the  hand- 
ling of  its  items  by  other  banks;  it  has  few  bank 
depositors;  its  individual  depositors  supply  only 
a  limited  amount  of  New  York  funds.  Conse- 
quently, it  has  to  buy  outright  for  its  New  York 
account  or  ship  currency  to  the  metropolis. 

In  connection  with  this  department  in  inland 
banks  is  usually  operated  the  sale  of  travelers' 
cheques.  Travelers'  cheques,  issued  by  certain 
express  companies  and  banks,  and  payable  at  al- 
most any  point  in  the  world,  are  a  source  of  great 
convenience.  We  are  all  familiar  with  the  form 
of  this  cheque — its  line  of  figures  across  the  face, 
showing  the  value  in  different  countries;  the  line 

^  Humphrey  Robinson,  A  Simple  Explanation  of  Modern  Bank- 
ing. 


DOMESTIC  EXCHANGE  DEPARTMENT    103 

for  the  buyer's  signature,  by  which  he  is  identi- 
fied in  a  strange  place.  In  a  subsequent  chapter 
this  form  of  exchange  will  be  more  fully  discussed.  ^ 

An  idea  of  how  New  York  predominates  in  the 
financial  world  in  one  respect  can  be  gathered 
from  the  following  comparisons,  arrived  at  from 
the  Report  of  the  Comptroller  of  the  Currency  for 
1909.  The  net  deposits  in  New  York  national 
banks  were  almost  three  times  those  in  both  Chi- 
cago and  St.  Louis,  the  other  two  central  reserve 
cities;  were  equal,  approximately,  to  the  net  de- 
posits of  the  other  forty-six  reserve  cities;  were 
equal  to  one  fourth  of  the  entire  deposits  of  all 
national  banks,  excluding  its  own;  and  were  equal 
to  about  one  fifth  of  all  national  bank  deposits  in 
the  United  States.  The  net  deposits  in  New  York 
national  associations,  at  that  time,  amounted  to 
$1,179,000,000  in  round  numbers.  Now,  state 
bank  deposits  have  not  been  concentrated  as 
much  in  one  city,  but  when  we  remember  that 
the  deposits  of  national  banks  equal  thirty-nine 
per  cent  of  all  deposits  in  the  country,  it  is  not 
marvelous  that  New  York's  influence  is  so  great. 

But  New  York  exchange  is  by  no  means  the 
only  kind  dealt  in.  It  is  necessary  for  large  banks 
to  keep  accounts  in  many  prominent  cities  to 
accommodate  demands,  both  private  and  corpo- 
rate. Persons  who  buy  exchange  of  a  bank  are 
charged  a  small  fee,  usually  only  a  trifle  over  cost. 
Naturally  enough,  however,  certain  designated 
customers,  by  virtue  of  the  excellence  of  their 
accounts,  are  allowed  exchange  without  extra 
charge. 

'  Chapter  xviii. 


CHAPTER  XI 

THE  INDIVIDUAL  LEDGER 

A  BANK  ledger  of  individual  accounts  is  an  inno- 
cent looking  book  which  contains  more  mischief 
and  hard  knocks  than  the  casual  observer  would 
believe.  It  is  the  simplest  of  all  books,  having 
merely  columns  for  dates,  debits,  credits,  and 
balances.  But  the  manner  in  which  work  must 
be  done  in  it,  as  will  be  shown  later,  makes  it  the 
young  bank  man's  bugbear.  Ask  any  old  bank 
employee  what  the  most  thankless  job  about  the 
institution  is,  and  nine  times  out  of  ten  he  will 
tell  you  the  individual  books.  However,  we  must 
not  therefore  infer  that  they  are  unimportant, 
for  in  this  set  of  books  are  kept  the  records  of 
debits,  credits,  and  balances  of  all  the  bank's 
commercial  creditors  —  not  including,  of  course, 
any  accounts  of  other  banks,  of  States,  or  of  the 
United  States,  which  properly  belong  to  the  re- 
ciprocal or  bank  ledgers. 

The  individual  ledger  must  be  posted  and 
proved  up,  as  a  rule,  daily,  and  a  very  large  num- 
ber of  debits  and  credits  must  be  entered  thereon 
each  day.  It  differs  from  the  individual  ledger  of 
the  ordinary  business  house  in  that  work  on  it 
must  necessarily  be  done  very  rapidly  and  accu- 
rately, and  that  the  books  must  be  clean  and  in 
balance  before  the  doors  of  the  bank  are  reopened 
for  business. 

In  addition  to  posting,  which  we  shall  presently 


THE  INDIVIDUAL  LEDGER  105 

discuss  in  more  detail,  the  individual  bookkeeper 
must  watch  and  keep  an  accurate  record  of  all 
overdrafts  allowed,  and  of  new,  reopened,  and 
closed  accounts.  He  must  likewise  furnish  the 
proper  officer,  at  stated  periods,  with  a  list  of 
customers  who  seem  undesirable,  because  of  low 
balances  or  frequent  overdrafts;  also,  of  those 
who  make  a  frequent  habit  of  stopping  payment 
on  checks,  of  issuing  checks  dated  ahead,  or  of 
leaving  technical  errors  in  their  drafts  intention- 
ally. While  there  is  usually  an  officer  whose  duty 
it  is  to  examine  checks  at  the  close  of  business 
each  day  and  pass  upon  signatures,  dates,  indorse- 
ments, etc.,  the  bookkeeper  is  in  no  way  relieved 
of  the  responsibility,  for  he  may  often  detect  a 
discrepancy  in  time  to  save  money  for  the  bank, 
while,  if  it  were  allowed  to  wait  over  till  after 
hours,  the  chances  of  remedying  the  error  would 
be  lessened. 

The  individual  ledger  of  to-day  is  usually  a 
loose-leaf  book.  The  advantages  and  conven- 
iences of  this  form  of  book  are  too  apparent  to 
require  any  elucidation.  But  a  great  many  very 
large  banks  use  a  permanent  sheet  ledger.  The 
ordinary  ledger  sheet  has  space  reserved  and  lined 
off  at  the  top  for  name  and  address.  Below,  the 
paper  is  so  ruled  that  there  is  a  column  on  the 
left-hand  edge  for  the  date,  a  wider  column  next 
divided  into  small  spaces  for  amounts  of  checks  in 
detail,  then  narrower  vertical  rulings  for  checks 
in  aggregate,  deposits,  and  balances. 

Now  twice,  and  sometimes  oftener,  during  the 
day,  collection  is  made  of  home  checks  from  the 
tellers,  the  general  bookkeeper,  the  collection  and 


106  PRACTICAL  BANKING 

the  exchange  departments,  it  being  so  arranged 
that  one  of  these  collections  shall  be  made  at  the 
time  when  the  clearing  returns  are  received.  At 
the  same  time  collection  is  made  of  all  deposit 
slips.  These,  being  distributed  alphabetically,  are 
turned  over  to  the  several  bookkeepers,  who 
immediately  set  to  work.  It  must  be  nip  and  tuck 
to  finish  as  quickly  as  possible;  at  the  same  time 
they  are  to  see  that  accuracy  is  maintained  both 
in  calculating  and  in  posting  to  the  right  ac- 
counts. 

A  very  important  feature  of  posting  is  to  ob- 
serve due  care  in  putting  down  dates  correctly. 
This  should  be  done  not  only  as  regards  the  days 
and  months,  but  as  regards  the  years  also.  It 
has  come  within  the  experience  of  the  writer  to 
be  involved  in  several  complications,  always 
embarrassing,  and  in  at  least  one  instance  serious, 
because  a  bookkeeper  has  been  careless  in  this 
particular.  It  is  also  of  the  utmost  importance 
that  care  be  exercised  in  placing  debits  and  credits 
to  the  proper  account.  For  instance,  suppose 
John  W.  Smith  has  this  morning  made  a  deposit 
of  four  hundred  dollars  and  the  bookkeeper  hast- 
ily credits  it  to  the  account  of  John  M.  Smith. 
Now,  if  John  M.  Smith  be  an  unscrupulous  man, 
nothing  is  easier  than  to  write  a  check  for  the 
total  amount  shown  to  his  credit,  cash  it,  and 
escape.  Even  if  he  is  caught,  it  is  a  question 
whether  he  could  be  handled  legally.  It  is  even  as 
important  to  see  that  no  check  is  charged  to  the 
wrong  account,  for  the  double  reason  that  a  man 
mav  overdraw  his  account  without  his  or  the 
bank's  knowledge,   and  that  the  institution  is 


THE  INDIVIDUAL  LEDGER  107 

extremely  likely  to  lose  what  may  be  a  valuable 
account  and  earn  the  customer's  enmity. 

When  all  checks  and  deposits  have  been  posted 
and  the  bank  is  closed  for  the  day,  the  time  for 
proving  the  day's  work  is  at  hand.  As  a  prelim- 
inary step  a  journal  is  made  of  the  individual 
checks  and  deposits  on  different  sheets.  This  is 
done  with  the  adding-macliine,  the  credits  and 
debits  being  so  di\'ided  as  to  fall  into  sections  cor- 
responding to  the  different  ledgers.  Now,  the 
total  of  deposits  for  each  section  is  added  to  the 
balance  of  that  section  for  the  previous  day;  the 
checks  are  subtracted.  With  a  total  of  these  bal- 
ances the  amounts  on  the  books  must  be  made  to 
coincide.  The  summa  summarum  of  these  sec- 
tions should  agree  with  the  general  bookkeeper's 
record  of  the  total  balance  of  individual  deposits 
for  that  day.  Then  comes  the  actual  proving-up 
of  the  ledgers.  There  are  three  well-known 
methods  of  balancing  the  ledger;  namely,  (1)  the 
trial  balance;  (2)  the  statement-duplicate;  (3)  the 
debit  and  credit  "tab." 

The  trial  balance  is  the  oldest  system,  one  that 
has  about  suffered  natural  and  eminently  satis- 
factory death.  The  clerk  has  a  second  book  by 
him  in  which  are  the  names  of  the  customers  in 
his  ledger.  As  he  posts,  he  writes  down  the  bal- 
ance of  each  customer  opposite  his  name  on  the 
trial-balance  book.  If,  when  he  has  compared  an 
addition  of  his  totals  with  the  balance  of  his  sec- 
tion as  obtained  above,  there  should  not  be  ex- 
act coincidence  of  amounts,  he  must  search  for 
the  difference  even  to  the  last  penny.  In  all  cases 
overdrafts,  which  are  usually  brought  down  in 


108  PRACTICAL  BANKING 

red  ink,  must  be  subtracted  from  a  list  of  balances 
for  the  day. 

The  statement-duplicate  system  is  different. 
Here  every  check  and  deposit  is  posted  twice 
daily  —  each  time  by  a  different  man  in  a  differ- 
ent book.  In  the  afternoon  the  names  and  bal- 
ances affected  during  the  day  by  posting  are 
called  from  one  book  and  verified  on  the  other. 
In  this  event,  it  is  only  necessary  to  prove  up  the 
ledger  once  a  week,  for  it  is  the  rarest  thing  that 
two  experienced  bookkeepers  will  make  the  same 
error.  This  system  has  the  advantage  of  making 
pass-book  balancing  easy.  One  merely  gets  the 
checks  out  of  the  file  and  enters  their  totals  on  the 
pass-book,  for  the  duplicate  record  in  the  ledger 
can  be  torn  out  and  used  as  an  itemized  statement. 

The  debit  and  credit  "tab"  method  is  perhaps 
the  easiest  to  handle  of  all.  Placing  a  debit  or 
credit  "tab"  in  those  accounts  only  that  are 
changed  for  any  one  day,  the  bookkeeper  makes 
a  separate  list  of  the  balances  of  these  accounts 
for  the  present  and  previous  day.  Their  differ- 
ence should  just  equal  the  difference  between  the 
checks  and  deposits  for  that  particular  section 
on  that  particular  day.  The  advantage  of  this 
method  lies  in  the  fact  that  the  possibility  of  error 
in  adding  and  checking  is  reduced  and  confined 
to  the  number  of  accounts  changed  for  any  one 
day,  and  only  in  those  accounts  need  the  book- 
keeper look  for  his  error.  Once  in  a  fortnight, 
however,  the  entire  ledger  should  be  balanced. 

There  remains  the  simple  method  of  posting 
the  checks  and  deposits  on  the  regular  ledger  and 
then  adding  up  balances  to  make  them,  in  toto. 


THE  INDIVIDUAL  LEDGER  109 

agree  with  the  general  bookkeeper's  record.  This 
is  the  downright,  bludgeon  method,  taking  advan- 
tage of  none  of  the  short  cuts. 

Finally,  either  in  the  afternoon  following  the 
balance,  or  before  hours  on  the  next  business  day, 
all  entries  of  checks  and  deposits  should  be  veri- 
fied by  a  man,  other  than  the  one  who  posted 
them,  for  the  purpose  of  detecting  errors  that 
may  exist  of  credits  or  debits  to  wrong  parties. 


CHAPTER  XII 

THE  RECIPROCAL  OR  BANK  LEDGER 

Every  bank  which  accepts  deposits  of  checks 
—  and  all  do  —  receives  daily  a  large  number  on 
banks  in  places  more  or  less  distant.  These  items 
are  sent  for  collection,  as  described  in  an  earlier 
chapter,  and  unless  some  definite  arrangement 
exists  between  the  sender  and  the  receiver,  no 
special  accommodations  are  extended  and  the 
maximum  exchange  rate  is  charged.  But  every 
bank  has  special  agreements,  and  of  these  this 
chapter  has  to  treat. 

Arrangements  are  based  on  two  things:  first, 
reciprocal  agreement  by  which  mutual  special 
privileges  are  granted;  second,  the  carrying  of 
accounts.  The  latter  naturally  includes  those  ac- 
counts created  by  extension  of  credit.  These  two 
methods  result  in  quick  and  courteous  attention, 
and  in  minimum  or  advantageous  exchange  rates. 

The  reciprocal  agreement  consists  generally  of 
the  promise  of  one  bank  to  handle  certain  items 
at  a  definite  exchange  rate  in  return  for  a  similar 
favor.  In  this  manner  banks  can  mass  items  on  a 
wide  territory  into  their  letters  to  certain  associa- 
tions, which  can  handle  them  conveniently  at  a 
rate  from  one  half  to  one  fourth  what  they  would 
cost  if  sent  direct  to  each  bank.  Reciprocall3%  the 
senders  handle,  for  the  other  banks,  checks  on 
institutions  which  they  may  collect  at  a  low  rate 
or  even  at  par. 


RECIPROCAL  OR  BANK  LEDGER     111 

This  agreement  necessitates,  as  a  natural  con- 
sequence, an  account  on  the  reciprocal  or  bank 
ledger  of  each  bank.  On  the  ledger  of  the  sender 
a  charge  to  the  association  to  whom  the  items 
were  sent ;  on  the  receiver's  ledger,  a  credit  for  the 
sender.  The  forming  of  these  accounts  is  per- 
fectly incidental  and  may  be  only  temporary. 

The  second  arrangement  may  consist  of  the 
promise  of  one  bank  to  carry  a  certain  balance  in 
another,  in  return  for  which  it  secures  interest  on 
daily  balances  and  favorable  collection  rates. 
There  may  be  an  agreement  to  carry  mutual 
accounts,  or  agreements  combining  the  first 
method  with  this  one.  All  of  these  are  reciprocal 
accounts. 

"Reciprocal  accounts  are  such  accounts  as  bear 
only  on  transactions  between  banks,  the  term 
'reciprocal'  being  given  these  accounts  because 
of  the  mutual  exchange  of  business."  In  many 
associations  these  are  not  known  as  reciprocal 
accounts,  nor  is  the  ledger  known  as  the  recipro- 
cal ledger;  they  are  bank  accounts  and  it  is  the 
bank  ledger.  But  reciprocal  expresses  the  mutu- 
ality of  the  accounts  so  well  that  we  shall  use  it 
by  preference. 

Unless  permanent  by  agreement,  these  accounts 
are  cleared  by  remittance;  that  is,  the  collecting 
bank  sends  its  check  on  New  York  or  some  other 
city  of  par  standing  for  the  amount  of  the  items, 
less  the  exchange.  Sometimes  the  accounts  are 
only  remitted  for  on  demand.  In  other  cases  the 
bank  having  the  credit  asks  its  clearance  once  or 
twice  monthly.  At  that  time  it  requests  the 
amount  to  be  remitted  to  it  or  placed  to  its  credit 


112  PRACTICAL  BANKING 

with  a  correspondent.  However,  the  creditor 
bank  is  likely,  at  any  time  it  may  have  need  of 
funds,  to  order  a  certain  amount  remitted  to  it  or 
sent,  either  in  check  or  currency  form,  to  one  of 
its  agents. 

The  book  on  which  reciprocal  accounts  are 
kept  is  no  more  than  an  ordinary  bank  ledger. 
Its  pages  are  ruled  off  for  the  title  and  appropri- 
ate information  at  the  top,  with  columns  below 
for  date,  amount  of  credit  or  debit,  and  credit 
or  debit  balance;  for  on  reciprocal  sheets,  by  their 
very  nature,  there  need  not  necessarily  be  credit 
balances.  If  a  bank  has  an  amount  on  deposit  in 
another  bank,  it  has  a  credit  balance  there,  but 
if  it  is  keeping  in  its  bank  a  deposit  of  the  other 
institution,  it  has  a  debit  balance  there.  It  is  the 
case  of  the  individual  customer  and  his  bank  over 
and  over.  The  bank  has  on  its  books  a  credit  for 
him;  he  has  on  his  books  a  debit  against  it.  To 
be  sure,  with  the  individual  customers  it  remains 
always  in  this  sense,  save  in  the  case  of  over- 
drafts, while  with  reciprocal  accounts  a  double- 
action  process  is  possible;  that  is,  it  may  be  a 
credit  balance  to-day  and  a  debit  balance  to- 
morrow. 

It  is  easy  to  see  how  closely  this  department  is 
allied  to  the  transit  department,  for  most  of  the 
checks,  drafts,  and  charges  against  and  to  the 
credit  of  the  reciprocal  customers  are  handled 
by  the  foreign  cash  items  men.  The  innumerable 
items  sent  out  in  cash  letters  are  frequently 
charged  on  the  bank  ledger  from  the  sheet, 
already  described,  filled  out  in  the  transit  depart- 
ment. 


RECIPROCAL  OR  BANK  LEDGER     113 

The  items  received  by  the  paying  teller,  receiv- 
ing teller,  and  other  clerks,  drawn  against  their 
own  bank  by  other  associations,  are  charged  on 
their  books  to  the  proper  banks,  to  be  transferred 
to  the  reciprocal  ledger  by  the  bookkeeper,  or,  as 
seems  more  regular,  to  be  charged  to  the  recip- 
rocal bookkeeper,  who  receives  them  and  makes 
the  proper  entries  from  the  original  items. 

Most  of  these  bank  accounts  are  created  and 
maintained  by  an  agreement  which  offers  a  cer- 
tain amount  of  interest  on  daily  balances.  This 
is  in  addition  to  usual  arrangements  for  a  line  of 
credit  —  but  that's  another  story.  Two,  three, 
or  even  four  per  cent  is  paid  on  such  accounts. 
In  most  cases  interest  is  figured  about  the  first  of 
every  month.  The  method  in  general  vogue  of 
computing  the  amount  of  interest  due  on  average 
balances  is  to  discover  the  total  amount  of  deposit 
for  one  day  and  figure  on  such  a  basis.  The  old 
arithmetical  rule  says,  "Multiply  the  deposit  bal- 
ance for  one  day  by  the  number  of  days  in  the 
interest  period  to  find  a  total  for  one  day."  But 
in  bank  accounts,  the  balances  vary  from  day  to 
day.  So  the  same  result  is  obtained  by  simply 
adding  up  on  the  machine  the  balances  for  each 
day.  Of  course,  for  holidays,  the  balance  of  the 
previous  business  day  is  repeated. 

"WTien  the  interest  has  been  figured  and  verified, 
it  is  entered  to  the  credit  of  the  proper  bank,  and 
a  notification  card  is  sent  out  to  the  bank,  stating 
that  such  and  such  an  amount  has  been  placed 
to  its  credit  as  interest  on  average  daily  balances 
for  the  month.  It  is  then  verified  by  the  receiving 
bank,  and  if  any  mistake  has  been  made,  ncgotia- 


114  PRACTICAL  BANKING 

tions  are  commenced  for  its  correction.     These 
difficulties,  however,  are  not  usually  serious. 

What  is  a  more  arduous  task  is  the  reconcile- 
ment of  accounts.  By  reconcilement  is  meant  the 
comparing  of  the  two  banks'  records  of  their 
mutual  accounts.  This  is  done  about  the  last  of 
the  month. 

There  is  during  the  month,  if  the  account  be 
active,  a  large  volume  of  transactions  of  the  books 
of  the  two  associations.  Suppose  A  carries  an 
account  with  B.  B  is  in  a  large  city,  and  so  checks 
drawn  on  it  are  in  constant  demand.  A  pays  his 
remittances  to  banks,  sending  him  collections,  in 
checks  on  B,  subtracting  a  suitable  exchange  fee. 
He  also  sells  a  good  deal  of  exchange  of  B  to 
customers  and  others  desiring  it,  likewise  charg- 
ing a  fee.  Possibly  he  draws  on  B  to  place  other 
deposits  or  to  cover  the  proceeds  of  a  discount, 
or  to  transmit  funds  to  the  United  States  Treas- 
urer. At  least,  at  the  end  of  the  month  he  has 
made  quite  a  few  drafts. 

So  B  gets  out  all  the  drafts  and  other  charges 
which  have  been  made  against  A's  account,  and 
discovers  whether  their  total  subtracted  from  the 
former  balance  and  all  subsequent  deposits  leaves 
the  present  balance  on  the  ledger.  If  so,  it  pro- 
ceeds to  itemize  the  deposits  and  subtract  the  total 
of  charges  on  a  statement  form,  which  it  incloses 
with  the  paid  checks.    Then  comes  the  rub. 

It  maybe  claimed,  and  I  think  it  will  be  granted, 
that  bank  men  are  very  accurate  in  their  work. 
The  nature  of  their  business  demands  it.  But  they 
are  heirs  to  all  human  fallibility,  including  the 
liability  to  clerical  error.  Add  to  this  human  fail- 


RECIPROCAL  OR  BANK  LEDGER     115 

ing  a  distance  of  several  hundred  miles,  the  multi- 
plicity of  checks,  and  the  long  interval  in  which 
no  attempt  is  made  to  reconcile  the  accounts, 
and  we  have  some  cause  for  occasional  variance 
of  the  two  accounts.  Further,  there  is  the  matter 
of  charge  tickets,  of  which  something  will  be  said 
presently. 

If  a  bookkeeper  has  many  accounts  to  keep  and 
little  time,  he  must  work  very  rapidly.  He  may 
post  a  check  erroneously,  —  that  is,  to  the  wrong 
account,  —  and  if  he  makes  the  proper  deduction, 
his  balance  will  not  show  the  discrepancy.  This 
is  true  of  deposits  in  even  a  greater  degree.  The 
bookkeeper  will  detect  most  of  his  errors  of  post- 
ing to  the  wrong  account  when  he  rechecks  his 
work,  but  if  the  drafts  of  the  banks  involved  in 
such  an  error  are  very  similar,  he  may  not  catch  it 
even  then.  He  may,  under  these  conditions,  not 
detect  the  mistake  in  making  out  the  statements, 
so  that  one  sometimes  finds  in  the  checks  charged 
against  his  bank  checks  drawn  by  another  bank 
whose  draft  form  is  similar  to  his.  But  this  rarely 
occurs. 

It  is  quite  possible,  and  sometimes  actually 
happens,  that  deposits  in  form  of  cash  letters  of 
drafts  and  checks  fail  to  reach  their  due  destina- 
tion. This  is  in  time  detected  and  traced  by  the 
credit  notification  plan.  But  if  the  deposit  be  sent 
near  the  close  of  the  month  and  does  not  reach  its 
destination,  time  enough  may  not  have  elapsed 
to  take  up  the  matter  of  failure  to  receive  notifica- 
tion before  the  statements  are  sent  out. 

Let  it  not  be  misunderstood,  however,  that 
these  errors  are  everyday  happenings.    In  fact, 


116  PRACTICAL  BANKING 

expert  bookkeepers  rarely  make  them,  or,  at  least, 
quickly  detect  them.  But  they  are  possible,  and 
occasional  mistakes  show  along  what  line  the 
bookkeeper  has  to  be  most  careful. 

So  the  statement  is  made  out  according  to  B's 
ledger  and  forwarded,  together  with  the  drafts, 
to  A.  A  may  find  some  charges  of  which  he  knows 
nothing,  or  he  may  discover  some  other  bank's 
check  among  his  and  charged  to  him.  On  the 
other  hand,  he  may  find  no  trace  of  what  a  certain 
charge  stands  for,  and  in  that  case,  barring  mathe- 
matical errors,  he  suspects  some  "charge  slip"  of 
which  he  has  no  record.  Or  it  may  be  that  some 
deposit  has  not  been  credited  or  has  not  reached 
its  destination.  Anyway,  he  immediately  sets  to 
work,  with  B's  assistance,  to  locate  the  error. 

In  the  matter  of  "charge  tickets"  or  "charge 
slips  "  a  word  of  explanation  is  necessary.  When 
a  bank  sends  items  for  collection  and  they  are 
immediately  placed  to  its  credit  pending  collec- 
tion, it  is  often  necessary  to  charge  off  some  or  all 
of  them,  because  of  their  subsequent  dishonor. 
This  is  not  done  by  check,  of  course,  but  by  a 
ticket  specifying  the  charge  and  its  cause,  and 
signed  by  some  proper  oflBcer.  The  unpaid  items, 
with  a  memorandum,  are  sent  to  the  bank  from 
which  they  came.  Each  bank  then  makes  a  cross- 
entry  and  the  affair  is  closed.  The  charge  tickets 
are  sometimes  not  included  with  the  checks  at  the 
end  of  the  month.  So  it  is  possible  that  some 
return  of  unpaid  items  may  have  strangely  failed 
of  its  destination,  and  the  bank  to  which  it  was 
charged  does  not  have  a  record  of  the  debit.  But 
in  most  banks,  charge  slips  are  returned. 


RECIPROCAL  OR  BANK  LEDGER     117 

There  is  usually  no  trouble  in  reconciling  these 
differences  when  they  do  occur.  But  now  and  then 
a  hard  case  will  come  up.  The  writer  has  in  mind 
an  instance  where  a  small  check,  returned  for  non- 
payment, was  apparently  lost  in  the  mails.  At 
least,  the  bank  to  which  it  was  directed  claimed 
not  to  have  received  it.  The  statement  at  once 
showed  a  discrepancy.  The  other  bank  wrote 
promptly  about  it.  The  item  was  traced,  but  no 
vestige  could  be  found.  So  the  one  bank  con- 
tinued in  its  charge  of  the  check,  and  the  other 
continued  to  carry  the  balance  on  its  book,  as 
though  no  such  charge  had  been  made.  Thus  it 
went  on  merrily  for  several  months,  each  state- 
ment being  followed  by  a  letter  from  the  irascible 
cashier  of  the  other  bank,  demanding  that  the 
charge  be  taken  off.  At  last,  the  signer  of  the 
check,  who  had  meantime  made  it  good,  con- 
sented to  issue  a  duplicate  check  in  its  place. 

It  has  been  seen  that  the  reciprocal  bookkeeping 
department  is  one  of  the  main  arteries  of  the  bank. 
It  caters  to  a  certain  kind  of  customer  from  whose 
accounts  much  general  profit  can  be  derived. 
Through  these  customers  avenues  are  opened  up 
for  getting  accommodation  and  advantageous 
terms  for  a  large  volume  of  its  business.  It  is  just 
a  process  —  as  the  name  implies  —  of  giving  and 
receiving,  of  offering  certain  rates  here  for  certain 
rates  there,  of  exchanging  deposits,  etc. 


CHAPTER  XIII 


THE  GENERAL  BOOKS 


It  has  been  shown  that  each  phase  of  the  bank's 
work  is  detailed  to  some  particular  department  — 
deposits  to  the  receiving  teller,  disbursements  to 
the  paying  teller,  loans  and  discounts  to  the  loan 
clerk.  It  has  also  been  shown  that  each  daily 
balances  his  credits  with  his  debits. 

But  for  the  sake  of  convenience,  and  because 
good  business  methods  imperatively  call  for  it, 
there  must  be  some  general  department  where  all 
the  transactions  of  the  bank,  in  compact  form, 
are  gathered,  compiled,  and  tabulated.  It  is  ne- 
cessary to  provide  means  for  a  general  survey  or 
recapitulation  of  total  resources  and  liabilities. 
This  is  accomplished  by  the  use  of  the  general 
ledger.  In  addition  to  collecting  one  day's  trans- 
actions into  one  book,  the  general  ledger  has  some 
special  functions  of  which  we  shall  speak  in  the 
proper  place. 

As  a  basis  for  this  treatment  of  the  accounts 
handled  on  the  general  ledger,  it  is  necessary  to 
summarize  briefly  the  kinds  of  business  handled 
by  the  several  departments.  The  paying  teller 
handles  home,  clearing  and  foreign  items,  cash, 
loans  and  discounts,  exchange,  etc. ;  the  receiving 
teller,  home,  clearing  and  foreign  items,  deposits, 
cash,  and  exchange.  So,  we  might  continue 
through  the  whole  gamut  of  bank  departments, 
and  probably  we  should  find  that  the  following 


THE   GENERAL  BOOKS  119 

accounts  were  necessary  on  the  general  ledger: 
bank,  individual  and  savings  deposits,  loans  and 
discounts,  interest  and  discount,  interest  on  de- 
posits, interest  from  banks,  expense  accounts, 
exchange,  certificates  of  deposits,  certified  and 
cashier's  checks.  If  to  these  are  added  accounts 
for  capital  stock,  surplus,  undivided  profits,  furni- 
ture, real  property,  bonds,  and  the  clearing  house, 
the  principal  accounts  on  the  general  books  are 
named. 

General  accounts,  as  a  rule,  do  not  record  in- 
dividual transactions,  but  show  in  aggregate  each 
day's  transactions  under  their  proper  heads. 

Although  not  first  in  the  enumeration,  capital 
stock  deserves  the  first  place  in  a  logical  discus- 
sion of  these  accounts.  Capital  stock,  of  course, 
is  the  working  basis  of  the  bank,  subscribed  by 
persons  who  believe  it  to  be  good  investment. 
Before  a  national  bank  can  open  its  doors  for 
business,  fifty  per  cent  of  the  capital  stock  must 
be  paid  in.  It  therefore  always  owns  a  credit 
place  on  the  ledger. 

From  time  to  time,  banks  add  part  of  their 
earnings  to  a  surplus  account.  This  simply  in- 
creases the  ratio  which  assets  bear  to  liabilities 
and  increases  the  book  value  of  the  capital  stock. 
Before  declaring  each  dividend,  national  associa- 
tions have  to  set  aside  a  certain  part  of  their 
earnings  as  surplus,  until  it  reaches  a  figure  equal 
to  twenty  per  cent  of  the  capital. 

The  name  "undivided  profits"  completely  be- 
trays its  utility.  Credits  made  to  it  are  transfers 
from  income-bearing  accounts,  such  as  interest 
and  discount  or  bond  income.    Charges  against 


120  PRACTICAL  BANKING 

it  are  usually  transfers  to  the  surplus  account,  and 
to  cashier's  checks,  the  latter  of  which  is  in  turn 
reduced  by  dividend  checks  for  the  amount  of 
the  transfer. 

Fluctuating  and  constantly  changing,  the  loans 
and  discounts  account  is  rapidly  filled  and  refilled 
with  entries.  This  is  caused  by  the  continual 
liquidation  of  debts  and  the  relending  of  the 
bank's  credit.  This  account  will  show  at  a  glance 
just  the  total  amount  owing  the  bank  for  notes 
and  other  discounts.  Many  banks  keep  separate 
accounts  of  demand  and  time  loans. 

There  are  always  several  deposit  accounts.  In 
general,  they  are  public,  bank,  individual  and 
savings,  and  certificates  of  deposit.  Public  de- 
posits include  federal,  state,  or  county  deposits, 
usually  put  at  interest  and  not  actively  drawn 
against.  Bank  deposits,  steady  or  temporary,  are 
reciprocal.  Individual  deposits  refer,  naturally, 
to  the  commercial  or  checking  accounts  of  per- 
sons, firms,  or  corporations.  Savings  accounts, 
with  certificates  of  deposit  in  a  slightly  different 
sense,  are  accounts  little  drawn  against  and  put 
at  interest. 

On  the  ledger  there  are  also  accounts  to  show 
the  debit  and  credit  of  cashier's  checks,  of  certi- 
fied checks,  of  exchange  collected  and  paid,  of 
interest  and  discount,  of  interest  on  deposits,  and 
of  interest  received  from  other  banks.  A  word  of 
explanation  may  not  be  amiss  in  regard  to  the 
last-named.  The  account  for  interest  from  banks 
records  the  interest  for  balances  carried  in  those 
banks.  More  of  this  bank  interest  has  been  spoken 
of  in  the  previous  chapter.  The  bond  income  ac- 


THE  GENERAL  BOOKS  121 

count,  as  the  name  suggests,  shows  the  result  of 
the  work  which  the  investment  in  bonds  is  doing. 
The  actual  account  of  bonds  belonging  to  the 
bank  is  quite  another  account. 

In  cities  where  there  are  clearing  houses,  the 
members  carry  clearing-house  accounts  on  the 
general  ledger,  which  show  just  how  the  bank 
fared  on  each  day's  clearing,  whether  debited  or 
credited.  The  best  business  methods  prompt  the 
collection  and  payment  of  clearing-house  bal- 
ances each  day,  so  that  this  account  is  always 
balanced  off  at  the  close  of  the  day.  But  in  cities 
where,  instead  of  actual  money  being  paid  into 
the  clearing  house  for  balances  and  collected  from 
it,  drafts  are  issued  in  favor  of  credit  banks  and 
against  debit  banks,  this  account  is  not  always 
balanced  out.  Frequently,  in  such  cities,  the 
clearing-house  draft  is  sent  through  as  a  clearing 
check  itself.  This  is  not  always  a  sound  policy, 
however.  Another  clearing-house  account  is  kept 
on  the  general  books  in  cities  where,  as  in  New 
York,  the  associated  members  carry  large  amounts 
on  deposit  in  the  vaults  of  the  clearing  house. 

On  the  national  bank  ledger  is  found  a  five- 
per-cent-redemption  account.  It  must  always 
show  a  credit  equal  to  five  per  cent  of  the  bank's 
circulation,  and  must  be  kept  on  deposit  with  the 
Treasurer  of  the  United  States,  to  cover  redemp- 
tions of  the  bank's  circulation. 

The  methods  of  general  bookkeeping  depart- 
ments are  almost  as  many  and  varied  as  there  are 
different  banks  and  different  officers.  There  is 
the  same  fundamental  organization,  the  same  pur- 
pose, but  the  details  are  worked  out  to  comply 


122  PRACTICAL  BANKING 

with  local  conditions.  In  describing  this  depart- 
ment, therefore,  we  are  endeavoring  to  give  as 
general  an  account  as  possible,  selecting  for  the 
different  features  the  methods  which  seem  best  to 
accomplish  their  intended  end. 

On  account  of  the  diversity  and  entirely  dif- 
ferent style  of  accounts,  the  general  ledger  is  more 
engaging  work  than  the  individual  book.  The 
latter,  by  reason  of  its  routine,  is  likely  to  grow 
monotonous. 

In  the  larger  banks  several  men  are  employed 
for  the  general  ledger  alone;  in  the  smaller  ones, 
only  one.  Sometimes  the  general  and  bank 
ledgers  are  kept  by  the  same  man,  and,  if  we  but 
go  far  enough  and  look  in  at  the  country  book- 
keeper, we  may  see  him  driving  away  at  all  of  the 
books,  general,  bank,  and  individual,  with,  per- 
haps, the  whole  between  two  covers. 

Many  associations  require  the  general  book- 
keeper to  keep  a  "  cash  sheet,"  which  shows  at  a 
glance  how  much  money  the  bank  has  in  its  vaults 
on  a  certain  day,  the  amount  taken  in  and  dis- 
bursed by  all  the  departments,  including  letters 
received  containing  items  for  collection  and  credit, 
notes  discounted  and  paid,  remittances  made,  and 
exchange.  It  simply  is  a  convenient  method  for 
spreading  such  information  on  one  sheet  as  may 
be  necessary  to  show  the  transactions  of  one  day. 
Close  akin  to  this,  in  one  respect,  is  a  loose-leaf 
sheet,  generally  kept  by  the  transit  department, 
showing  on  one  side  the  remittances  received  for 
cash  letters  sent  out,  along  with  the  exchange  paid, 
and  on  the  reverse  side  the  amount  of  cash  letters 
mailed  on  the  same  day. 


CHAPTER  XIV 

THE  SAVINGS  DEPARTMENT 

As  we  have  seen,  the  modern  bank  has  grown 
to  be  a  general  exchange  mart  of  credit.  It  has 
come  to  be  the  medium  through  which  people 
may  expeditiously  handle  business  based  on  faith 
in  each  other.  Accounts  are  formed,  by  a  process 
of  credit,  for  the  purpose  of  making  drafts  against 
them  to  liquidate  other  indebtednesses. 

I 

But  there  is  a  class  of  accounts  which  cor- 
responds closely  to  those  contained  in  such  in- 
stitutions as  the  old  Bank  of  Amsterdam,  namely, 
accounts  which  represent  money  deposited  for 
safe-keeping.  As  there  is  a  larger  cash  basis  for 
them  and  as  they  are  not  actively  checked  against, 
they  are  more  profitable  to  banks,  in  proportion 
to  their  amount,  than  ordinary  commercial  ac- 
counts. This,  with  the  fact  that  money  can  al- 
ways demand  a  certain  percentage  of  interest 
outside,  has  led  to  the  general  bank  practice  of 
offering  interest  on  savings  accounts. 

There  are,  of  course,  institutions  which  con- 
duct a  purely  savings  business,  but  their  scope  is 
too  broad  for  consideration  here.  We  shall,  there- 
fore, devote  ourselves  to  a  short  discussion  of  the 
savings  department  of  the  commercial  bank, 
though,  perforce,  frequent  reference  may  be 
made  to  savings  banks. 


124  PRACTICAL  BANKING 

In  his  Report  for  1909,  the  Comptroller  of  the 
Currency  says :  — 

Peculiar  interest  attaches  to  statistics  relating  to 
savings  institutions,  inasmuch  as  they  are  the  reposi- 
tories of  the  accumulations  of  wage-earners  mainly 
and  an  index  to  thrift.  The  functions  of  these  institu- 
tions are  essentially  different  from  those  of  commercial 
banks,  as  savings  banks  are  a  part  of  a  system  the  aim 
of  which  is  the  safe  and  profitable  investment  of  the 
funds  of  those  who  are  not  so  situated  as  to  invest 
their  own  money,  and  in  this  respect  a  mutual  savings 
institution  is  the  property  of  its  depositors. 

From  1820,  with  10  savings  banks  in  the  coun- 
try having  deposits  equal  to  $1,138,576,  or  an 
average  of  twelve  cents  per  capita  in  the  United 
States,  to  1911,  with  1884  savings  banks  having 
deposits  amounting  to  $4,212,583,598,  or  an 
average  of  $44.82  per  capita  in  the  United  States, 
we  made  gigantic  strides  in  the  development  of 
this  important  branch  of  banking.  The  increase 
in  per-capita  savings  from  1909  to  1911  was 
$3.07.  This  large  advance  is  probably  due  to  the 
recuperation  of  savings  after  the  stringency  fol- 
lowing the  flurry  in  1907.  The  progress  of  savings 
deposits  is  a  tribute  to  the  thrift  and  energy  of 
American  blood.  In  1911  there  were  9,794,000 
depositors,  or  one  in  every  ten  inhabitants.^ 

But  not  only  is  there  a  vast  amount  deposited 
in  strictly  savings  institutions,  but  a  huge  num- 
ber of  banks,  doing  a  commercial  business,  have 
savings  departments.  On  September  1,  1911,  the 
national  banks  of  our  country  and  island  pos- 

*  See  Report  of  the  Comptroller  of  the  Currency,  1911.  For  postal 
savings  figures,  which  are  separate  from  these,  see  infra,  pp.  131^. 


THE  SAVINGS  DEPARTMENT         125 

sessions  had  on  savings  deposit  $659,501,543.90, 
and  the  state  banks  had  $574,936,098.65.  The 
total  savings  in  24,392  banks  in  the  United  States 
and  islands  amounted  to  $5,445,724,306.77.  This 
was  exclusive  of  about  $1,900,000,000  placed  on 
certificates  of  deposit. 

It  is  natural  to  wonder  why  it  is  profitable  to 
conduct  a  savings  bank  or  a  savings  department. 
At  first  blush,  it  would  seem  less  lucrative  than  a 
commercial  banking  business,  and  perhaps,  all 
and  all,  it  is.  Yet  a  savings  bank  may  be  so  man- 
aged as  to  net  large  dividends.  Savings  deposi- 
tors are  steadier  —  that  is,  they  draw  less  against 
their  accounts  —  than  those  doing  a  mercantile 
business.  Thus,  there  is  a  larger  amount  per  hun- 
dred dollars  deposited  that  may  be  looked  upon 
as  permanently  available  for  lending.  Then,  too, 
since  there  are  fewer  transactions,  there  is  a 
smaller  expense  incurred  in  operating  than  in  the 
commercial  department.  Last,  the  savings  bank 
can  safely  invest  a  much  larger  percentage  of  its 
deposits  than  a  bank  doing  a  mercantile  business. 
In  1908  the  average  ratio  of  cash  in  savings  banks 
to  deposits  was  1.25  per  cent;  in  1909,  it  was 
.88  per  cent.^ 

Thus  it  may  be  seen  that  the  savings  depart- 
ment is  a  highly  desirable  adjunct  to  any  bank. 
Were  there  less  profit  in  it,  most  banks  would 
operate  it,  nevertheless,  in  order  to  supply  every 
demand  made  upon  them  by  their  customers  for 
banking  facilities. 

*  Usually  no  cash  reserve  is  required  of  savings  banks.  Usually, 
too,  they  may  demand  sixty  days'  notice  on  any  withdrawals.  See 
Digest  of  State  Banking  Statutes,  by  S.  A.  Welldon,  National  Moni- 
tary  Commission  Series. 


126  PRACTICAL  BANKING 

The  savings  department  is  not  intended  for 
and  does  not  appeal  to  firms,  corporations,  or 
even  individuals  who  check  regularly  against 
their  accounts.  It  aims,  primarily,  to  cater  to 
those  wishing  to  accumulate,  by  degrees,  with 
little  or  no  withdrawals,  a  snug  sum.  Next,  it 
appeals  to  treasurers,  guardians,  and  trustees, 
who  have  money,  not  often  drawn  upon,  to  put 
at  interest.  Then  it  accommodates  many  indi- 
viduals who  like  to  put  on  interest  any  surplus 
which  they  are  holding  temporarily,  in  contempla- 
tion of  a  future  investment  elsewhere. 

Some  banks  place  a  minimum  figure  for  bal- 
ances, say  twenty-five  or  fifty  dollars,  since 
otherwise  a  "raft"  of  very  small  accounts,  not 
worth  the  cost  of  handling,  will  accumulate. 
This  must  be  contended  with  by  banks  which 
open  accounts  as  small  as  fifty  cents  or  one  dollar. 
For  on  the  impulse  of  the  moment,  many  persons 
will  make  a  resolve  to  start  saving,  and  will  de- 
posit one  or  two  dollars,  after  which  their  zeal 
cools  and  they  proceed  to  neglect  their  account. 
There  it  stands  on  the  bank's  ledger  taking  as 
much  space  and  nearly  as  much  time  as  a  five 
thousand  dollar  account.  To  cater  especially  to 
this  small  depositor,  the  postal  savings  bank, 
which  will  be  discussed  farther  on,  was  created. 

The  banks  which  do  seek  the  very  small  de- 
positor sometimes  employ  a  corps  of  paid  solici- 
tors who  scour  the  community,  trying  to  secure 
a  large  number  of  beginners,  hoping  to  obtain 
some  very  desirable  accounts  by  the  gradual  sift- 
ing process.  These  banks  have  numerous  ways 
of  "tempting"  the  pubhc.   They  get  out  beauti- 


THE  SAVINGS  DEPARTMENT         127 

ful  little  safes,  some  containing  a  register  of  con- 
tents; some  a  clock;  others  are  in  the  form  of  neat 
little  books  which  can  be  stowed  away  in  the 
pocket.  There  are  hundreds  of  different  styles 
of  "banks"  which  are  placed  in  the  hands  of  peo- 
ple, for  the  loan  of  which  only  a  small  cash  de- 
posit is  required.  As  a  rule,  however,  the  larger 
the  bank,  the  less  desirable  are  such  accounts. 

Interest  on  savings  accounts  varies  from  two 
to  four  per  cent.  In  1909  savings  banks  paid  an 
average  of  3.72  per  cent  on  savings  deposits;  na- 
tional banks,  3.34  per  cent;  state  banks,  3.71  per 
cent;  and  private  banks,  3.43  per  cent. 

A  brief  word  about  certificates  of  deposit. 
These  certificates  are  issued  by  every  bank,  and 
read  to  the  effect  that  such  a  person  has  deposited 
a  stated  amount,  to  draw  interest  if  it  remains  on 
deposit  for  a  certain  length  of  time.  Some  banks 
stop  the  interest  accruing  at  the  end  of  the  speci- 
fied period  unless  the  certificate  is  renewed; 
others  will  pay  interest  for  the  total  life  of  the 
paper.  Still  others  specify  in  the  body  of  the 
certificate  that  the  principal  deposited  may  not 
be  withdrawn  until  the  date  of  maturity.  The 
total  amount  of  money  invested  in  demand  certi- 
ficates of  deposit  and  time  deposits  in  the  United 
States  for  the  year  1911  was  $1,900,000,000. 

Another  form  of  certificate  which  is  popular 
with  transients  is  that  which  shows  at  a  glance 
what  the  interest  amounts  to  for  a  certain  time. 
These  certificates  are  issued  on  printed  forms  for 
twenty-five,  fifty,  seventy-five  dollars,  etc.  In 
a  space  below  is  given  the  interest  that  will  ac- 
cumulate in  three  months,  six  months,  twelve 


128  PRACTICAL  BANKING 

months,  etc.  In  other  words,  one  can  tell  in  an 
instant  the  value  of  his  certificate.  The  name  of 
the  buyer  of  the  certificate  is  filled  in  and  he  is 
required  to  sign  his  name  in  a  designated  place, 
by  which  he  may,  after  the  fashion  of  traveler's 
checks,  be  identified.  The  proper  officer's  signa- 
ture validates  the  certificate.  In  the  case  of  at 
least  one  large  bank,  these  certificates  contain, 
on  the  reverse  side,  a  list  of  banks  scattered 
throughout  the  country  which  will  honor  these 
certificates  and  pay  the  proper  interest. 

II 

The  large  associations  not  only  have  a  separate 
department  for  the  handling  of  savings  accounts, 
but  they  also  have  a  force  under  the  direction  of 
a  savings  manager  or  secretary.  Under  this  secre- 
tary are  the  tellers  and  bookkeepers.  The  tellers, 
whose  duties  largely  involve  the  receiving  of 
money,  have  functions  partaking  both  of  the 
paying  and  receiving  tellers,  though  exactly  like 
neither.  As  a  rule,  they  do  not  have  to  rush 
through  their  work  like  their  fellows  in  the  com- 
mercial department,  for,  as  has  been  remarked, 
the  transactions  on  savings  accounts,  in  propor- 
tion to  the  amount  of  deposits,  are  much  fewer 
than  on  checking  accounts.  The  result  is  that 
the  tellers  have  more  time  to  cultivate  that  pleas- 
ant familiarity  with  customers  which  is  such  an 
asset  in  a  department  where  women  and  children 
and  others  who  like  personal  notice  have  to  be 
waited  upon.  But,  like  the  other  tellers,  they  are 
constantly  on  their  guard  against  frauds  and  mis- 
takes of  their  own.    A  plan,  followed  by  some 


THE  SAVINGS  DEPARTMENT         129 

banks  to  check  with  the  ledgers  the  balances  on 
pass-books,  is  to  have  the  teller  jot  down  on  every 
deposit  slip  or  check  the  pass-book  balance.  This 
may  be  compared  with  the  ledger  as  posting  is 
done. 

Twice  or  four  times  annually  interest  is  cal- 
culated on  each  savings  account  and  credited. 
The  most  laborious  part  of  the  work  is  saved  by 
tables  which  show  the  amount  of  interest  —  at 
the  given  rate  —  for  one  month  on  all  amounts. 
The  calculator  only  has  to  discover  the  average 
balance  for  one  month,  multiply  it  by  the  num- 
ber of  months,  and  he  has  the  sum  on  which  in- 
terest is  to  be  figured.  Reference  to  the  tables 
speedily  shows  the  amount  of  interest.  Every 
calculation  should  be,  and  generally  is,  carefully 
verified  by  a  second  man.  The  interest,  once 
verified,  is  "run  through"  the  teller's  book  as  a 
deposit,  offset  in  his  cash  by  a  voucher  properly 
signed.  It  is  a  simple  matter  to  add  the  interest 
to  each  person's  account,  but  it  is  not  such  a 
simple  matter  to  get  it  credited  on  the  pass-books. 
It  is  always  tedious  to  wait  for  them  to  be  brought 
in  voluntarily,  and,  therefore,  in  many  banks,  a 
call  is  made  for  them  when  interest  is  paid. 

Ill 

Like  the  foreign  exchange  department,  the 
savings  department  of  a  large  association  is  really 
itself  a  bank  in  miniature.  It  is  a  means  of  safe 
and  profitable  investment  for  the  wage-earner, 
for  the  woman  and  the  child,  for  trustees,  and 
those  having  money  on  hand  for  temporary  de- 
posit. 


130  PRACTICAL  BANKING 

But  as  we  remarked  earlier  in  the  chapter, 
many  banks  do  not  encourage  very  small  ac- 
counts. For  some  years  the  matter  of  the  estab- 
lishment of  government  banks,  to  cater  to  the 
depositor  who  wishes  to  start  with  little  and 
gradually  build  up  a  neat  balance,  was  agitated. 
The  Postal  Savings  Bank  Bill  was  passed  in  1910. 

Mr.  Thomas  B.  Paton  thus  succinctly  describes 
the  postal  savings  bank:  ^ 

The  Postmaster-General,  the  Secretary  of  the  Treas- 
ury, and  the  Attorney-General  are  constituted  a  board 
of  trustees  with  authority  to  designate  such  post- 
offices  as  the  board  may  select  to  be  postal  savings 
depository  offices  to  receive  deposits  of  funds  from  the 
public.  The  minimum  deposit  which  will  be  received 
is  one  dollar,  and  deposits  may  be  of  a  larger  amount 
in  multiples  thereof,  not  exceeding  one  hundred  dollars 
in  any  calendar  month,  and  the  maximum  deposit  of 
any  one  depositor  is  fixed  at  five  hundred  dollars,  ex- 
clusive of  accumulated  interest.  The  bill  provides  for 
the  sale  of  adhesive  "postal  savings  stamps"  to  be 
attached  to  a  postal  savings  card  in  order  that  smaller 
amounts  may  be  accumulated  for  deposit;  when  such 
cards  contain  stamps  in  amounts  of  one  dollar,  or 
multiples  thereof,  they  are  acceptable  as  deposits.  The 
law  provides  that  interest  at  the  rate  of  two  per  cent 
shall  be  credited  to  the  depositor  each  year.  It  pro- 
vides that  postal  savings  funds  shall  be  deposited  in 
solvent  banks,  whether  organized  under  national  or 
state  laws,  such  banks  being  subject  to  national  or 
state  supervision  and  examination,  and  the  deposits 
in  banks  to  bear  interest  at  the  rate  of  not  less  than 
two  and  a  quarter  per  cent  per  annum,  which  rate 
shall  be  uniform  throughout  the  country.    Provision 

^  Journal  of  the  American  Bankers'  Association,  July,  1910. 


THE  SAVINGS  DEPARTMENT         131 

is  made  that  funds  received  at  postal  savings  deposi- 
torj'-  offices  shall  be  deposited  in  banks  in  the  same 
locality.  A  reserve  of  five  per  cent  of  postal  savings 
funds  is  to  be  kept  with  the  Treasurer  of  the  United 
States. 

Any  person  ten  years  or  over  in  age  can  open 
an  account  in  his  or  her  own  name;  any  woman 
can  have  an  account  in  her  own  name  and  "free 
from  any  control  or  interference  by  her  husband." 
However,  no  person  may  have  a  deposit  in  more 
than  one  postal  savings  bank.^ 

Clearly  this  act  appeals  to  the  small  depositor. 
The  savings,  national,  and  state  banks  of  the 
nation  retain  practically  all  their  big  savings  de- 
positors, a  large  number  of  their  smaller  ones, 

^  Perhaps  no  better  idea  of  how  the  postal  savings  bank  makes  its 
appeal  can  be  got  than  from  the  following  letter  to  the  author  from 
the  Honorable  T.  L.  Weed,  then  director  of  the  postal  savings  sys- 
tem, dated  August  3,  1912:  — 

"While  the  acceptance  of  deposits  of  small  amount  and  the  sale 
of  ten-cent  savings  cards  and  stamps  make  the  postal  savings  sys- 
tem of  special  value  to  wage-earners  and  children,  the  patronage  of 
the  system  is  by  no  means  confined  to  those  classes.  In  fact  over 
twelve  per  cent  of  the  depositors  up  to  June  30,  1911,  were  engaged 
in  what  are  classed  by  the  Bureau  of  the  Census  as  'proprietary, 
oflScial,  and  supervisory  occupations,'  and  nineteen  per  cent  of  the 
remainder  followed  professional  and  clerical  occupations." 

The  following  data,  furnished  the  author  by  the  Honorable  A.  M. 
Dockery,  Third  Assistant  Postmaster-General,  indicates  the  official 
status  of  the  postal  savings  system  on  July  21,  1914:  — 

"On  June  30,  1914,  there  were  9(i44  offices  with  10,352  deposi- 
tories (including  708  branches  and  stations)  in  operation  in  the 
United  States  and  of  these  9644  offices  8.505  were  of  the  presidential 
grade  and  11.39  fourth-class.  On  this  date  the  number  of  depositors 
was  about  397,000,  and  the  amount  on  deposit  was  approximately 
$43,100,000,  or  an  average  of  $109  per  depositor.  Of  the  $43,100,- 
000  on  deposit  about  $31,200,000,  or  over  seven  tenths  (72.4  per 
cent),  was  held  in  the  271  offices  having  deposits  of  $20,000  and 
over,  and  about  $22,700,000,  or  over  one  half  (53.9  per  cent),  in  the 
45  offices  having  $100,000  and  over.   Over  one  fifth  of  the  total 


132 


PRACTICAL  BANKING 


and  at  the  same  time  are  able  to  secure  postal 
deposits  at  two  and  one  quarter  per  cent.  As  the 
postal  savings  bank's  sponsors  claimed,  it  has 
drawn  a  vast  amount  of  money,  formerly  hoarded, 
into  banks,  and  is  apparently  encouraging  thrift 

amount  on  deposit  was  held  in  the  four  offices  (New  York,  Chicago, 
Brooklyn,  and  Boston)  having  over  $1,000,000  on  deposit.  The 
offices  having  $100,000  and  over,  with  the  amount  of  funds  held  by 
each,  are  as  follows :  — 


1.  New  York  City $4,394,059  24. 

2.  Chicago,  111 2,305,932  26. 

3.  Brooklyn,  N.Y 1.501.446  26. 

4.  Boston,  Mass 1,133,009  27. 

6.  Portland,  Greg 897,498  28. 

6.  San  Francisco,  Cal 875.446  29. 

7.  Cincinnati.  Ohio 690,030  30. 

'  8.  St.  Paul.  Minn 689.445  31. 

9.  Kansas  City,  Mo 586.865  32. 

10.  Pittsburg,  Pa 586,759  33. 

11.  Columbus,  Ohio 668.623  34. 

12.  Los  Angeles.  Cal 647.152  36. 

13.  Detroit.  Mich 646.296  36. 

14.  Philadelphia.  Pa 630,964  37. 

15.  St.  Louis.  Mo 507,406  38. 

16.  Milwaukee,  Wis 463.956  39. 

17.  Butte,  Mont 408,046  40. 

18.  Denver,  Colo 401.630  41. 

19.  Cleveland.  Ohio 387.223  42. 

20.  Seattle,  Wash 341,170  43. 

21.  Tacoma,  Wash 316,940  44. 

22.  Washington,  D.C 263.978  45. 

23.  Toledo,  Ohio 249.669 


Newark,  N.J $237,976 

Omaha,  Neb 234,370 

Oakland,  Cal 222,291 

Louisville,  Ky 217,760 

Minneapolis,  Minn 206.923 

Providence,  R.I 187,375 

Leadville,  Colo 183,025 

Duluth,  Minn 176,048 

San  Diego.  Cal 170,950 

Buffalo,  N.Y 166,113 

Indianapolis,  Ind 162.128 

Kansas  City,  Kan 154,284 

Dallas.  Tex 153,915 

Ironwood,  Mich 150,080 

Memphis,  Tenn 133,194 

Akron,  Ohio 121,645 

Dayton,  Ohio 121.122 

Erie.  Pa 111,403 

Roslyn,  Wash 106.464 

New  Orleans,  La 105,703 

Astoria,  Oreg 104.100 

Bellingham,  Wash 100,309 


"The  $43,100,000  on  deposit  is  exclusive  of  $4,635,820,  which  is 
the  sum  withdrawn  by  depositors  prior  to  July  1,  1914,  for  the  pur- 
pose of  buying  postal  savings  bonds.  Applications  amounting  to 
$872,240  were  received  for  the  issue  of  July  1, 1914,  and  this  amount 
will  be  withdrawn  in  July. 

"The  Postal  Savings  Act  provided  that  the  funds  received  shall 
be  deposited  in  solvent  banks,  and  that  are  organized  under  national 
or  state  laws  and  subject  to  national  or  state  supervision  and  ex- 
amination, it  being  stipulated  that  the  word  '  bank '  shall!  be  held 
to  include  savings  banks  and  trust  companies  doing  a  banking  busi- 
ness. Under  these  provisions  6715  banks  in  the  United  States  have 
qualified  to  receive  postal  savings  funds,  classified  as  follows:  3627 
national  banks;  2099  state  banks;  347  savings  banks;  617  trust 
companies;  25  'organized'  private  banks." 


THE  SAVINGS  DEPARTMENT         133 

in  those  who  either  had  no  facilities  or  hesitated 
because  of  the  smallness  of  their  deposits. 

If  one  wishes,  he  may  surrender  his  deposit  in 
sums  of  twenty,  forty,  sixty,  eighty,  one  hundred 
dollars,  and  multiples  thereof,  and  receive  in 
lieu  United  States  coupon  or  registered  bonds 
bearing  two  and  one  half  per  cent  interest  an- 
nually. 


CHAPTER  XV 

THE   FORMATION  AND   POWERS  OF 
THE   NATIONAL  BANK 

During  the  Civil  War  the  Federal  Govern- 
ment was  financially  embarrassed.  The  gigantic 
struggle  emptied  the  Treasury  more  rapidly  than 
the  revenues  of  the  country  could  refill  it.  To 
assist  the  Washington  Government,  the  clearing 
houses  of  the  East  came  forward  with  loans;  the 
Government  itself  issued  bonds,  but  buyers  were 
few  and  suspicious.  Then,  some  of  the  financial 
geniuses  of  the  time  conceived  the  idea  of  tempt- 
ing purchasers  by  allowing  them  special  privileges 
in  certain  instances.  The  name  of  Salmon  P. 
Chase  is  foremost  among  these  astute  construc- 
tive financiers.^ 

The  National  Bank  Act  was  the  fruit  of  their 
ideas.  Banks  formed  under  this  act  were  allowed 

*  The  National  Bank  Act,  as  we  now  know,  did  not  prove  to  be 
a  measure  which  would  prevent  panics.  At  best,  it  standardized 
bank  notes.  But  then  it  must  be  remembered  that  it  was  not  in- 
tended primarily  as  a  currency  reform,  but  to  provide  a  market  for 
United  States  bonds.  At  the  same  time  it  would  be  unfair  to  Chase 
to  say  that  he  merely  stumbled  into  a  system  engendered  by  the 
ercigencies  of  the  times.  Andrew  McFarland  Davis,  in  The  Origin  of 
the  National  Banking  System,  National  Monetary  Commission 
Series,  shows  that  Chase's  mind  had  attacked  the  financial  system 
of  the  United  States  as  a  currency  problem.  Had  the  necessities  of 
the  Civil  War  not  intervened  as  they  did,  who  can  tell  but  what  we 
should  have  had,  from  the  brain  of  Chase  and  his  contemporaries, 
some  scheme  for  providing  a  currency  based  on  actual  business 
transactions? 

For  the  provisions  for  such  a  currency,  see  chapter  xx. 


THE  NATIONAL  BANK  1S5 

circulating  notes,  to  be  secured,  however,  by 
United  States  bonds  deposited  with  the  Treas- 
urer of  the  United  States.  There  was,  however, 
one  obstruction  to  the  success  of  the  plan.  State 
banks  were  issuing  circulating  notes,  and  there 
was  no  direct  power  to  stop  them.  To  remove 
this  competing  institution,  therefore,  a  prohibi- 
tory tax  of  ten  per  cent  was  placed  on  all  circu- 
lating bank  notes  save  those  authorized  by  the 
National  Bank  Act.  Thus,  state  banks  either  be- 
came national  banks  —  and  therefore  had  to  pur- 
chase federal  bonds  —  or  gave  up  the  advantage 
of  a  circulation. 

The  act  has  provided  a  safe  currency,  but  not 
one  calculated  to  alleviate  or  prevent  periodic 
financial  stringencies.  It  does  not  expand  and 
contract  to  suit  the  exigency  of  the  season  or  the 
general  financial  situation.  True,  it  has  a  cer- 
tain elasticity,  but  it  is  only  the  elasticity  "of  the 
old  rubber  band  which  may  be  stretched  to  a  cer- 
tain extent,  but  which  does  not  contract  again." 
The  act  has  had  many  new  and  helpful  provi- 
sions, however,  and  we  have  at  last  evolved  a 
system  which  will  meet  the  demands  of  the  coun- 
try and  not  cater  merely  to  the  convenience  of 
the  Government  —  since  that  necessity  has  dis- 
appeared long  ago. 

A  national  bank  may  be  formed  by  a  group  of 
persons,  not  less  than  five  in  number.^ 

^  "In  view  of  these  provisions,  it  has  been  the  uniform  policy  of 
the  Comptroller  to  investigate  carefully  each  application  to  enable 
it  to  be  determined  whether  or  not  the  case  is  entitled  to  favorable 
consideration  before  definite  action  is  taken  by  the  prospective 
incorporators. 

"It  has  been  for  some  time  past  the  practice  of  this  ofBce  to  refer 


136  PRACTICAL  BANKING 

The  first  step  toward  organization  is  the  adop- 
tion of  articles  of  association,  which  state  briefly 
the  object  of  the  organization,  and  which  also 
contain  provisions  necessary  for  the  general  con- 
duct of  its  business,  provided  such  regulations  are 
consistent  with  law.  A  copy  of  these  articles 
signed  by  the  organizers  must  be  transmitted  to 
the  Comptroller  of  the  Currency. 

Second,  an  "organization  certificate"  is  drafted 
which  enumerates :  — 

(1)  The  name  assumed  by  the  association 
(subject  to  the  approval  of  the  Comp- 
troller of  the  Currency). 

(2)  The  exact  location  of  its  offices. 

(3)  The  amount  of  capital  stock. 

(4)  The  names  and  residences  of  the  stock- 
holders, and  the  number  of  shares  each 
holds. 

Upon  filing  the  articles  of  association  and  the 
organization  certificate,  the  bank  becomes  a 
corporate  body,  and  has  the  power :  — 

to  national-bank  examiners  all  applications  received  for  the  organi- 
zation of  national  banks. 

"Some  of  the  points  to  be  covered  in  the  investigation  are:  — 

"  (A)  The  standing  of  the  applicants  in  the  community. 

"  (B)  Are  the  directors  to  be  local  men  with  an  active  interest  in 
the  bank. 

"  (C)  In  case  the  question  turns  on  whether  or  not  there  is  need 
of  another  bank,  submit  a  statement  showing  the  amount  of  'pur- 
chased paper'  held  by  the  bank  or  banks  in  the  place,  and  state  the 
percentage  of  such  '  purchased  paper '  to  the  total  amount  of  loans 
and  discounts  of  the  bank. 

"(D)  In  cases  where  the  necessity  for  another  bank  is  open  to 
question,  please  state  whether  or  not  the  bank,  if  established,  would 
obtain  entirely  new  business  or  would  draw  such  business  from  ex- 
isting institutions."  Re-port  of  the  Comptroller  of  the  Currency,  1911, 
pp.  77-78. 


THE  NATIONAL  BANK  137 

(1)  To  have  succession  for  twenty  years,  un- 
less otherwise  dissolved. 

(2)  To  elect  or  appoint  directors,  who  shall 
select  the  president,  cashier,  and  other 
officers,  defining  their  duties,  requiring 
bonds,  and  having  power  of  dismissal. 

(3)  To  adopt  by-laws,  not  inconsistent  with 
law,  for  regulating  the  appointment  of 
oflScers,  the  transference  of  stock,  and  the 
conduct  of  the  business  of  the  bank. 

(4)  To  exercise  by  its  board  of  directors,  or 
duly  authorized  officers,  the  power  of  carry- 
ing on  business  by  "discounting  and  nego- 
tiating promissory  notes,  drafts,  bills  of 
exchange,  and  other  evidences  of  debt;  by 
receiving  deposits;  by  buying  and  selling 
exchange,  coin,  and  bullion;  by  loaning 
money  on  personal  security;  and  by  ob- 
taining and  issuing  circulating  notes." 

A  very  important  feature  of  a  bank's  organiza- 
tion is  its  capital  stock,  and  it  must  here  be  some- 
what explained.  Amendments  to  the  statutes  in 
1900  allow  the  organization  of  banks  with  $25,000 
capital  in  towns  of  3000  inhabitants  or  less;  with 
$50,000  in  towns  of  6000  inhabitants  or  less;  and 
with  $100,000  in  other  towns;  except  that  a 
bank  in  a  city  of  50,000  population  or  more  can- 
not be  organized  with  less  than  $200,000  capital 
stock. 

Before  a  national  bank  can  begin  business,  the 
capital,  divided  into  shares  of  one  hundred  dol- 
lars each,  must  have  been  at  least  half  paid  up. 
And  at  the  end  of  each  month  after  it  opens  its 
doors,  ten  per  cent  of  the  whole  must  be  paid,  till 


138  PRACTICAL  BANKING 

the  entire  subscribed  and  authorized  capital  is 
paid  in. 

Any  association  may,  upon  the  vote  of  holders 
of  two  thirds,  of  the  shares,  increase  its  capital 
stock  to  any  sum  approved  by  the  Comptroller 
of  the  Currency,  notwithstanding  any  limit  fixed 
by  its  articles  of  organization.  Likewise,  those 
holding  two  thirds  of  the  stock  may  authorize 
the  reduction  of  its  capital  to  any  figure,  subject 
to  two  conditions :  first,  that  it  shall  not  be  under 
the  amount  of  capital  required  for  organization; 
and,  second,  that  it  shall  not  be  less  than  the 
amount  of  outstanding  circulation.^  At  elections, 
the  shareholders  may  vote  by  proxies,  duly  au- 
thorized in  writing,  but  no  officer  or  employee  of 
the  bank  may  act  as  proxy.  No  shareholder  may 
vote  whose  liability  is  past  due  and  unpaid. 

In  a  previous  chapter,-  we  have  considered  the 
relation  of  the  directors  to  the  bank  in  the  practi- 
cal conduct  of  its  affairs.  Let  us  now  look  for  a 
moment  at  their  technical  duties,  privileges,  and 
qualifications  in  the  national  bank. 

They  are  elected  annually  on  such  a  day  in 
January  as  may  be  selected,  and  hold  office  for 
one  year.  The  law  requires  that  at  least  five  di- 
rectors shall  be  elected,  all  of  whom  must  be 
citizens  of  the  United  States,  and  three  fourths  of 
whom  must  have  resided  in  the  State,  Territory, 
or  District  in  w^hich  the  bank  is  located  for  one 
year  previous  to  their  election.  All  are  required 
to  reside  there  during  their  incumbency. 

*  Under  the  Federal  Reserve  Act,  reductions  cannot  be  made 
without  the  approval  of  the  Federal  Reserve  Board. 
^  Chapter  n. 


THE  NATIONAL  BANK  139 

Every  director  must  own  in  his  own  name  ten 
or  more  shares  of  stock,  unless  the  capital  of  the 
bank  be  as  low  as  $25,000,  in  which  case  he  must 
be  the  owner  of  at  least  five  shares  of  stock.  If  he 
ceases  to  be  qualified  in  any  way,  he  forfeits  his 
place  on  the  board.  All  vacancies  on  the  board 
are  filled  by  appointment  by  the  remaining  di- 
rectors, and  the  appointee  holds  ofiice  until  the 
next  annual  election. 

Upon  entering  his  ofiice,  the  director,  whether 
appointed  or  elected,  must  take  oath  that  he  will 
honestly  and  diligently  perform  his  duties  and 
will  not  knowingly  violate  or  permit  to  be  vio- 
lated any  of  the  provisions  governing  the  bank's 
organization  and  regulation.  He  also  swears  that 
he  is  the  owner,  in  his  own  right,  of  the  requisite 
number  of  shares  of  stock,  and  that  this  stock  is 
unincumbered. 

Now,  the  most  apparent  advantage  of  organiz- 
ing a  national  bank  is  its  ability  to  issue  circulat- 
ing notes.  ^  These  notes  are  delivered  to  the  bank 
by  the  Comptroller  of  the  Currency  upon  the 
receipt  of  United  States  bonds,  which,  at  par 
value,  will  cover  the  notes  issued.  It  must  be 
understood,  however,  that  very  little  actual  profit 
accumulates  from  investment  in  circulating  notes. 
The  Report  of  the  Comptroller  of  the  Currency  for 
1909  contains  the  following  figures :  — 

In  October,  1909,  the  market  price  (of  2  per  cent 
consols)  has  fallen  to  $101,052,  when  the  profit  on 

'  This  was  a  fact  until  1913,  when  the  passage  of  the  Federal 
Reserve  Act  provided  that  national  banks  need  not  issue  circulating 
notes.  Under  the  new  law  there  are  other  methods  of  expanding  the 
currency  and  investing  funds  than  by  issuing  circulating  notes. 


140  PRACTICAL  BANKING 

circulation  (on  such  a  basis)  increased  to  1.334  per 
cent.  Panama  Canal  bonds  were  $100,595  in  October, 
1909,  the  rate  of  profit  being  1.384  per  cent.  .  .  .  The 
profit  on  circulation  secured  by  these  bonds  (4  per 
cent  loan  of  1925,  October,  1909,  quotation,  $117,320) 
was  1.211  per  cent. 

Mr.  Humphrey  Robinson  shows  the  method 
of  ascertaining  the  profit  on  circulation.^  He 
figures  on  a  basis  of  $100,000  circulation:  — 

Bonds  purchased:  U.S.  registered  two  per  cent 
bonds  to  be  paid  at  par  in  1930.  Price  of  bonds 
at  104 $104,000 

Par  value  of  bonds  purchased 100,000 

Money  worth  six  per  cent. 

Income  from  bonds 2,000 

Income  from  circulating  notes  loaned  at  six  per 

cent 6,000 

Total  income $8,000 

Less  deductions :  — 

Annual  tax  on  circulating  notes $500 

Sinking    fimd  to  retire  premium  on  bonds  at 
maturity,  amount  to  be  charged  ofif  each 

year 181 

Expenses  (plates,  express  charges,  etc.) 75      756 

Net  income  from  circulating  notes $7,244 

Net  income  from  loaning  $104,000  (net  cost  of 

bonds  purchased)  at  six  per  cent 6,240 

Net  profit  on  circulation $1,004 

On  such  a  basis  we  see  that  there  is  a  profit  of 
1.004  per  cent  on  the  amount  in  circulation,  which, 
however,  is  a  profit  of  only  .965  per  cent  on  the 
amount  invested  ($104,000). 

A  Simple  Explanation  of  Modern  Banking,  p.  104. 


1 


THE  NATIONAL  BANK  141 

All  associations  having  on  deposit,  to  secure 
their  circulation,  United  States  bonds  bearing 
two  per  cent  interest,  including  Panama  Canal 
bonds,  must  pay  the  Treasurer  in  January  of  each 
year  a  tax  of  one  fourth  of  one  per  cent  per  half- 
year  on  all  of  their  circulation  based  on  such 
bonds.  Banks  having  on  deposit,  to  secure  cir- 
culation, United  States  bonds  bearing  more  than 
two  per  cent  interest  must  pay  semiannually 
one  half  of  one  per  cent  tax  on  such  notes  as  are 
based  on  these  bonds. 

Every  association  having  circulating  notes 
based  on  securities  other  than  United  States  and 
Panama  Canal  bonds  must  pay  for  the  first  three 
months  a  tax  ^  of  three  per  cent  per  annum  on  the 
average  amount  of  such  circulation,  and  after- 
wards a  tax  of  one  half  of  one  per  cent  per  annum 
for  each  month  until  a  tax  of  six  per  cent  is 
reached,  and  thereafter  a  tax  of  six  per  cent  per 
annum  on  the  average  amount  of  such  circula- 
tion. This  tax  is  imposed  to  secure  the  quick  re- 
tirement of  emergency  currency  issued  under  the 
Act  of  May  30,  1908. 

The  Treasurer  at  Washington  has  a  deposit 
from  every  national  bank  amounting  to  five  per 
cent  of  its  circulation.  This  fund  is  used  as  an 
account  against  which  national  bank  note  re- 
demptions are  charged.  Whenever  national  bank 
currency,  worn,  mutilated,  or  otherwise  unfit  for 
use,  is  presented  to  the  Treasurer,  he  redeems  it  in 
United  States  money.  The  banks  to  whom  it  be- 

^  This  tax  is  meant  to  apply  to  emergency  currency  issued  under 
the  Aldrich-Vreeland  Act  of  1908,  but  is  a  reduction,  mad(!  by  the 
Federal  Reserve  Act  of  1913,  of  the  original  tax.  For  provisions  of 
the  Aldrich-Vreeland  Act,  see  page  157  et  seq. 


142  PRACTICAL  BANKING 

longs  are  notified,  and  when  redemptions  amount- 
ing to  five  hundred  dollars  or  more  for  one  bank 
have  accumulated,  the  bank  deposits  forthwith 
with  the  Treasurer  a  sum  equal  to  the  redemp- 
tions, and  receives  new  blank  currency  for  the 
redeemed  notes.  ^ 

There  are  other  advantages  in  conducting  a 
national  bank,  not  the  least  of  which  is  the  des- 
ignation as  a  United  States  depository.  Such  as 
are  selected  by  the  Secretary  of  the  Treasury 
receive  deposits  of  public  money,  which,  it  is 
unnecessary  to  remark,  is  useful  at  all  times  and 
especially  in  times  of  financial  flurry.  For  in- 
stance, the  author  remembers  one  bank,  ordi- 
narily-shaving $50,000  of  United  States  deposits, 
which  received  $300,000  during  the  panic  of 
1907-08. 

For  the  guaranty  of  the  safe  and  prompt  pay- 
ment of  these  deposits,  United  States  and  other 
bonds  or  securities  must  be  deposited  in  the  Treas- 
ury in  amount  satisfactory  to  the  Secretary  of 
the  Treasury.  The  Secretary  is  enjoined  by  law 
to  apportion  these  deposits  equitably  among  the 
States. 

At  such  a  rate  as  the  Secretary  may  prescribe 
—  not  less  than  one  per  cent  per  annum  —  in- 
terest is  paid  on  average  monthly  balances.  This 
includes  special  and  additional  deposits  of  public 
money  in  the  regular  depositories  and  such  asso- 
ciations as  may  be  selected  as  temporary  deposi- 
tories. 

^  Under  the  old  National  Banking  Law,  national  banks  might 
count  the  five  per  cent  redemption  fund  as  a  part  of  their  re- 
quired reserve.   The  Federal  Reserve  Act  repeals  this  privilege. 


THE  NATIONAL  BANK  143 

Banks  in  certain  cities  in  the  United  States, 
designated  as  reserve  cities,  must  carry  a  reserve 
equal  to  twenty-five  per  cent  of  their  deposits, 
exclusive  of  Federal  deposits.  However,  they  may 
carry  one  half  of  this  as  deposit  balances  in  one 
or  all  of  the  three  central  reserve  cities.  These 
central  reserve  cities  —  New  York,  Chicago,  and 
St.  Louis  —  must  keep  a  reserve  of  twenty-five 
per  cent  of  their  deposits  in  cash  or  in  certain 
credits  which  the  Government  recognizes.  All 
other  national  banks  need  carry  a  reserve  of  only 
fifteen  per  cent.  And  of  this,  three  fifths  may 
consist  of  credit  balances  in  banks,  in  either  re- 
serve or  central  reserve  cities,  while  two  fifths 
must  be  in  their  vaults.  In  addition  to  legal 
tender,  clearing-house  certificates,  for  which  law- 
ful money  has  been  deposited,  may  be  held  as 
reserve   by   a   member   of   the   issuing   clearing 

house.  ^ 

It  will  be  observed  that  banks  no  longer  are 
required  to  hold  reserve  against  their  circula- 
tion, as  was  originally  provided.  They  base  their 
reserve  on  the  amount  of  deposits  they  have, 
exclusive  of  federal  deposits. 

A  national  bank  may  charge  such  a  rate  of 
interest  as  is  permitted  or  authorized  by  the 
State,  Territory,  or  District  in  which  it  is  situ- 
ated. If  no  state  law  regulates  this  point,  seven 
per  cent  and  no  more  may  be  charged.  This, 
however,  does  not  preclude  the  charge  of  exchange 
or  collection  fees  on  drafts,  bills  of  exchange,  and 
discounts  payable  elsewhere. 

^  Again  see  chapter  xx  for  reserve  requirements  under  the  Fed- 
eral Reserve  Act. 


144  PRACTICAL  BANKING 

A  national  bank  may  not  accept  its  own  stock 
as  collateral  for  a  loan,  nor  may  it  buy  its  own 
stock  except  to  prevent  loss  on  a  debt  previously 
contracted  in  good  faith.  In  that  case  the  stock 
must  be  sold  again  within  six  months.  National 
banks  may  not  accept  United  States  notes  or 
notes  of  national  banks  as  collateral. 

A  national  bank  cannot  accept  real  estate  as 
collateral  for  a  loan,  but  there  are  a  few  cases 
in  which  it  may  own  the  title  to  realty,  namely: 

(1)  Property  for  its  own  housing  and  accom- 
modation. 

(2)  Property  that  may  be  mortgaged  to  it  in 
good  faith,  as  security  for  debts  previously 
made. 

(3)  That  which  may  be  deeded  to  it  in  pay- 
ment of  debts  previously  contracted  in  its 
ordinary  transactions. 

(4)  Such  as  it  may  purchase  at  a  sale  under 
judgment  held  by  itself,  or  may  purchase 
to  secure  debts  due  it. 

But  no  national  bank  may  hold  longer  than 
five  years  any  mortgage  or  title  taken  or  pur- 
chased for  the  security  of  a  debt. 

Semiannually,  the  directors  may  declare  a 
dividend  of  the  net  earnings  of  the  association, 
but  before  doing  so  they  must  add  one  tenth  of 
the  net  earnings  of  the  previous  half-year  to  the 
surplus  fund,  until  it  has  reached  an  amount 
equal  to  twenty  per  cent  of  the  capital  stock. 

The  Federal  Reserve  Act  (1913)  amended  the 
section  of  the  Revised  Statutes  concerning  what 
liabilities  a  national  bank  may  have  exceeding  in 
amount  its  capital  stock.    These  are  the  obliga- 


THE  NATIONAL  BANK  145 

tions  which  it  may  not  have,  in  amounts  greater 
than  its  capital  stock :  — 

(1)  Notes  of  circulation. 

(2)  Moneys  deposited  with  or  collected  by  the 
association. 

(3)  Bills  of  exchange  or  drafts  drawn  against 
money  actually  on  deposit  to  the  credit  of 
the  association  or  due  thereto. 

(4)  Liabilities  to  the  stockholders  of  the  asso- 
ciation for  dividends  and  reserve  profits 
(i.e.,  dividends  on  stock  in  the  Federal 
Reserve  Banks.) 

(5)  Liabilities  incurred  under  the  provisions  of 
the  Federal  Reserve  Act. 

From  134  national  banks  capitalized  at  $16,- 
000,000  to  7488  national  banks  capitaHzed  at 
$1,056,345,000  is  huge  progress;  it  represents  the 
growth  of  national  banks  in  this  country  from 
1863  to  1913  or  during  the  first  half-century  of 
their  history.  Other  figures  may  be  interesting. 
In  1864,  the  national  banks  were  in  number  equal 
to  only  9.6  per  cent  of  the  reporting  banks  of  the 
United  States,  with  a  capital  equal  to  3.7  per 
cent  of  the  capital  of  the  reporting  banks.  In  1913, 
the  number  of  national  banks  was  equal  to  28.8 
per  cent  of  all  reporting  banks  of  the  country, 
and  their  capital  equal  to  513  per  cent  of  the  re- 
ported bank  capital.  Thus,  while  the  ratio  of  the 
number  of  national  banks  to  the  whole  is  300  per 
cent  of  what  it  was  in  1864,  the  ratio  of  the  capi- 
tal to  the  entire  capital  is  now  1360  per  cent  of 
what  it  was  in  1864. 


CHAPTER  XVI 

NATIONAL  BANK  NOTES 


In  an  earlier  chapter  I  have  suggested  how 
paper  money  came,  as  a  matter  of  convenience, 
to  be  substituted  for  coin  or  bulHon.  This,  how- 
ever, does  not  explain  the  security  for  most  of  the 
"paper  money"  of  to-day.  For  example,  on  a 
certain  day  the  Bank  of  England  had  issued 
£51,000,000  of  notes,  for  which  £32,000,000  was 
held  in  gold;  the  Bank  of  France  had  issued 
£197,000,000  in  circulating  notes,  against  which 
was  held  £175,000,000  in  coin  and  bullion;  and 
the  Imperial  Bank  of  Germany  had  issued  £98,- 
000,000  of  notes,  for  the  security  of  which  £49,- 
000,000  was  held.  What,  then,  is  the  guaranty 
for  the  large  "uncovered"  portions  of  these 
issues.'*  For  the  most  part,  the  discrepancies  are 
represented  by  loans  to  the  ,  Government,  treas- 
ury notes,  or  individual  bills  rediscounted. 

But  suppose,  you  say,  that  every  one  should 
suddenly  demand  gold  or  silver  for  his  bank 
notes.  ^    Indubitably,  that  would  amount  to  a  ca- 

1  The  story  of  the  growth  of  the  use  of  gold  and  silver  as  media 
of  exchange  is  told  in  a  lively,  if  somewhat  inaccurate,  fashion  in  a 
book,  A  History  of  the  Precious  Metals,  by  Alexander  Del  Mar,  pub- 
lished in  1880. 

The  author  traces  the  coinage  of  the  precious  metals  into  money 
to  Phidon  of  Argos  (about  the  ninth  century  B.C.),  but  intimates 
that  the  practice  may  have  been  prevalent  in  India  at  a  much  more 
remote  date.   In  fact,  much  evidence  tends  to  indicate  that  coined 


NATIONAL  BANK  NOTES  147 

tastrophe  —  in  a  teapot.  It  would  reveal  only 
this,  that  there  is  no  good  reason  why  we  should 

money  was  used  in  countries  from  Egj^pt  to  India  —  Thibet,  Lydia, 
Phry-gia,  and  Crete  —  as  early  as  the  fourteenth  century  B.C.  The 
evidence  mainly  relied  upon  is  the  Code  of  Menes,  relating  the 
ratio  between  gold  and  silver,  which  Wilkinson  places  as  early  as 
2950  B.C.  Mr.  Del  Mar  instances  the  change  in  the  ratio  of  gold  and 
silver  between  the  fifteenth  century  B.C.  and  the  nineteenth  century 
A.D.,  which  was  from  "  1  silver  equals  10  gold"  to  "  1  gold  equals  20 
silver." 

Mr.  Del  Mar  had  a  "  purpose,"  and  that  was  to  prove  a  new  inter- 
pretation of  history,  namely,  one  based  on  the  production  of  gold 
and  silver.  Part  of  his  interesting  collection  of  historical  items  fol- 
lows. 

Many  Argonautic  expeditions  existed  in  antiquity.  Jason's  was 
not  the  first;  at  any  rate,  his  seems  to  have  been  largely  piratical. 
"Sardinia  at  that  time  contained  rich  placers  of  gold,  and  it  was 
probably  to  obtain  this  metal  that  Jason  and  his  companions  under- 
took that  part  of  their  memorable  voyage  which  carried  them  west- 
ward." 

Then,  it  seems,  the  Phoenicians  worked  the  gold  sands  of  Sarabat. 
About  500  B.C.,  Darius  undertook  his  conquests  for  the  sake  of 
money.  Alexander  the  Great  was  a  gigantic  plunderer  and  —  ac- 
cording to  the  author  —  secured  pecuniary  results  in  his  campaigns 
amounting  to  a  billion  dollars,  in  addition  to  slaughtering  several 
million  human  beings.  The  writer  continues  with  an  observation 
that  quartz  mining  was  attended  with  unusual  danger  and  cruelty. 
He  quotes  Diodorus,  who  visited  Egypt  about  fifty  years  B.C.  and 
found  well-nigh  intolerable  conditions  in  the  quartz  mines,  where  the 
overseer  "  lashes  them  [the  miners]  severely.  Deprived  of  all  hope, 
these  miserable  creatures  expect  each  day  to  be  worse  than  the  last; 
and  long  for  death  to  end  their  griefs." 

Next,  Mr.  Del  Mar  cites  the  constant  contests  for  Spain  as  a  fur- 
ther proof  of  his  contention  that  "  in  the  search  of  gold,  whole  races 
of  people  have  been  put  to  the  sword,  continents  subjugated,  re- 
ligions and  civilizations  destroyed."  Then  comes  the  case  of  the 
conquest  of  America  by  the  Spaniards. 

An  interesting  side-light  may  be  thrown  on  the  origin  of  the  hesi- 
tancy of  Orientals  to  exploit  natural  resources  by  the  author's  sug- 
gestion that  the  Chinese  long  opposed  the  mining  of  gold  and  silver 
because  it  would  force  people  into  servitude. 

The  remarkable  conclusion  to  which  Mr.  Del  Mar  comes  is  that 
the  desire  for  precious  metal  has  furnished  all  ages  with  an  "  irresist  i- 
ble  motive  for  cruelty,  injustice,  and  oppression.    In  the  Middle 


148  PRACTICAL  BANKING 

not  represent,  in  tangible,  movable  form,  other  val- 
ues than  those  of  silver  and  gold.  It  would  disclose 
only  this  "mystery,"  that  merchants  and  farmers 
had  borrowed  small  sums  —  for  which  they  had 
pledged  property  of  some  sort  —  from  their  local 
banks,  which  had,  in  turn,  indorsed  the  notes  or 
"bills"  and  rediscounted  them  at  the  central 
bank  of  issue.  There  is  no  sane  argument  against 
issuing  circulating  notes  on  the  security  of  such 
property.  Intrinsically,  a  house  or  an  iron  safe  is 
quite  as  valuable,  if  not  more  valuable,  than  a 
lump  of  gold  or  silver.  Abroad  this  truism  has 
long  been  recognized  and  even  we  Americans 
have  finally  come  to  the  conclusion  that  we  may 
very  cautiously  pass  notes  on  the  basis  of  other 
security  than  the  precious  metals  or  bonds. 

In  the  United  States  there  is  at  present  approx- 
imately $2,250,000,000  in  coin  and  bullion,  of 
which  $1,300,000,000  is  represented  by  gold  and 

Ages  it  stimulated  the  internecine  strife  into  which  Europe  was  for 
6ve  centuries  plunged"  and  which  was  terminated  only  by  the  dis- 
covery of  America. 

One  takes  a  deep  breath  when  he  finishes  this  —  a  breath  of  relief. 
To  what  extent  would  the  author  go?  He  has  confused,  in  his  en- 
thusiasm for  his  thesis,  economics  with  money,  when  as  a  matter  of 
fact  economics  has  been  connected  only  incidentally,  when  at  all, 
with  money.  He  overlooks  such  considerations  as  bread  and  meat, 
pasturage,  farming  land,  benign  climates,  and  other  impulses  to- 
ward strife.  Most  of  all,  he  forgets  entirely  the  most  frequent  im- 
mediate causes  of  invasions  and  wars  —  namely,  greed  for  power. 
In  the  last  analysis,  even  this  can  be  reduced  to  my  first  proposition 
above,  namely,  a  question  of  livelihoods  and  comforts.  I  fear  the 
author  has  been  carried  away  by  the  literary  appeal  of  his  imposing 
aggregation  of  historical  (?)  personages.  What  they  wanted  is  what 
men  mostly  want  to-day  —  the  power  over  other  men's  bodies  and 
minds.  Money  chanced  to  be  the  medium  through  which  this  desire 
was  manifested.  It  is  no  fault  of  "money"  itself,  which  is  well-nigh 
indispensable,  but  of  man's  uncurbed,  elemental  craving  for  power. 


NATIONAL  BANK  NOTES  149 

silver  certificates.  In  addition,  there  is  about 
$700,000,000  in  national  bank  notes,  secured  by 
United  States  bonds,  and  about  $350,000,000 
United  States  notes,  issued  on  the  credit  of  the 
Government,  against  which,  however,  may  be 
counted  almost  an  equal  amount  of  money  held 
in  the  Treasury  as  assets.  No  one  can  say  our 
system  is  not  safe. 

A  special  chapter  will  subsequently  be  devoted 
to  a  discussion  of  how,  fraught  with  politics  and 
urged  or  retarded  by  politicians,  a  new  system, 
which  is  even  now  receiving  its  first  practical 
test,  has  been  evolved  from  the  currency  question. 
For  the  present  purpose,  a  description  of  the 
issue  of  national  bank  notes  under  the  original 
National  Bank  Act  of  1863,  with  the  supplemen- 
tary scheme  of  1908,  will  suffice. 

A  national  bank  note  is  the  promise  of  the 
issuing  bank  to  pay  a  certain  sum  of  money 
on  demand,  —  nothing  more.  The  United  States 
Government  guarantees  the  payment  of  this  cur- 
rency, but  stands  to  lose  nothing,  as  it  is  secured 
by  bonds  deposited  with  the  Treasurer.  If  they 
are  simply  negotiable  I.O.U.'s,  why  do  not  state 
banks,  as  well  as  national  banks,  issue  circulating 
notes .^^  Just  because  the  Federal  Congress,  in 
organizing  the  national  banking  system,  laid  a 
prohibitive  tax,  as  we  have  seen,  of  ten  per  cent 
on  all  notes  issued  by  other  than  national  banks. 
This  forced  the  state  bank  currency  out  of  exist- 
ence, since  ten  per  cent  is  far  more  than  could  be 
earned  on  the  currency  issued.  On  the  other 
hand,  it  had  the  tendency  of  inducing  many 
state  banks,  which  desired  the  power  of  circula- 


150  PRACTICAL  BANKING 

tion,  to  become  national  associations.  As  we 
have  observed  in  the  foregoing  chapter,  the  act 
creating  national  banks  was  simply  a  measure  to 
make  a  ready  market  for  United  States  bonds. 

Every  national  bank  is  required  to  issue  a  cer- 
tain amount  of  circulating  notes.  If  the  associa- 
tion's capital  be  more  than  $150,000,  it  need  carry 
only  $50,000  in  notes;  if  its  capital  be  $150,000 
or  less,  its  circulation  must  at  least  be  equal  to 
one  fourth  of  its  capital  stock. 

The  circulating  notes  are  issuable  in  denomina- 
tions ranging  from  five  to  ten  thousand  dollars, 
but  not  more  than  one  third  of  the  bank's  cir- 
culation may  consist  of  five-dollar  notes.  No 
notes  larger  than  one  thousand  dollars  have  been 
issued.  When  the  national  bank  was  organized 
in  1864,  it  was  provided  that  notes  of  less  than 
five  dollars  value  might  be  issued,  but  in  quantity 
not  to  exceed  one  sixth  of  the  bank's  circulation. 
This  provision  became  inactive  upon  the  resump- 
tion of  specie  payments  in  January,  1879.  There 
are  still  approximately  $500,000  in  national  bank 
"ones"  and  "twos"  outstanding.  On  October 
31,  1911,  there  were  in  round  numbers  $740,000,- 
000  of  national  bank  notes  of  various  denomina- 
tions in  circulation  and  in  the  banks. 

Before  any  bank  may  commence  business,  it 
must  transfer  and  deliver  to  the  Treasurer  of  the 
United  States  registered,  interest-bearing  bonds 
of  the  United  States  in  such  amount  as,  at  par 
value,  will  cover  the  circulation  which  it  proposes 
to  take  out.^   It  may  deposit,  however,  Panama 

^  The  Federal  Reserve  Act  repeals  those  statutes  which  require 
that  "before  any  national  banking  association  shall  be  authorized 


NATIONAL  BANK  NOTES  151 

Canal  two  per  cent  bonds  in  lieu  of  the  regular 
United  States  bonds.  ^  If  the  market  value  of  the 
bonds  deposited  falls  below  par,  bonds  in  amount 
sufficient  to  cover  the  notes  at  the  market  value 
of  the  bonds  will  be  required  of  the  association 
by  the  Comptroller  of  the  Currency. 

After  depositing  bonds,  the  association  is  en- 
titled to  receive  from  the  Comptroller  of  the  Cur- 
rency national  bank  notes  in  blank,  signed  by 
the  Treasurer  and  the  Register  of  the  Treasury. 
The  notes  bear  the  promise  of  the  issuing  bank  to 
redeem  them  in  money  at  its  own  counter.  Below 
this  promise  is  space  for  the  signatures  of  the 
president  or  vice-president  and  the  cashier  of  the 
bank. 

On  the  back  of  the  notes  there  is  the  declara- 
tion of  the  United  States  Government  that  they 
may  be  tendered  in  payment  of  taxes,  excises, 
public  lands,  and  all  other  dues  to  the  United 
States  except  duties  on  imports;  that  they  are 
also  receivable  for  all  salaries  and  other  debts  and 
demands  except  interest  on  public  debt  and  in 
redemption  of  the  national  bank  currency. 

National  bank  notes  sent  to  the  Comptroller  of 
the  Currency  for  redemption  are,  if  they  are  fit 
for  circulation,  sent  to  the  issuing  banks  upon 
remittances  of  lawful  money  covering  them.    If 

to  commence  a  banking  business,  it  shall  be  required  to  transfer  and 
deliver  to  the  Treasurer  of  the  United,  States  a  stated  amount  of 
United  States  bonds." 

^  It  may  be  of  interest  to  note  that  on  a  given  date  —  say  in 
August,  1911  —  the  profit  on  issuing  national  bank  notes  based  on 
Panama  Canal  bonds  was  1.410  per  cent,  while  that  based  on  the 
consols  of  1930  was  1.393  per  cent  and  on  the  loan  of  1925  1.22G  per 
cent. 


152  PRACTICAL  BANKING 

they  are  badly  worn  or  mutilated,  they  are  de- 
stroyed by  maceration  in  the  presence  of  four 
persons,  namely,  one  representing  the  Secretary 
of  the  Treasury,  one  the  Treasurer,  one  the  Comp- 
troller of  the  Currency,  and  one  the  bank  whose 
notes  are  thus  destroyed.  A  certificate  of  the 
maceration  is  signed  by  the  witnesses  in  dupli- 
cate, one  copy  of  which  is  filed  in  the  office  of  the 
Comptroller  of  the  Currency,  and  one  forwarded 
to  the  association.  This  certificate  is  necessary, 
since  it  would  be  the  height  of  folly  to  remit  for 
currency  which  was  only  supposed  to  be  de- 
stroyed, but  which  might  at  some  future  time 
reappear  for  redemption.  The  certificate  guar- 
antees the  maceration  of  the  old  notes  and  there- 
fore protects  the  bank  against  any  possible  loss. 

In  place  of  the  currency  thus  redeemed  and 
destroyed  new  notes  in  blank  are  sent  to  the  asso- 
ciation upon  receipt  of  the  remittances  of  lawful 
money  covering  them.  These  notes  are  secured 
by  the  bonds  which  represented  the  destroyed 
currency. 

There  is  another  sort  of  national  bank  which  is 
provided  for  by  the  statutes,  but  which  is  little 
heard  or  known  of  at  large,  namely,  national  asso- 
ciations for  issuing  gold  certificates.  They  may 
be  organized  under  the  same  general  provisions 
as  the  other  national  banks,  but  bonds  which 
they  offer  for  security  of  circulation  must  be 
United  States  bonds  bearing  interest  in  gold. 
Notes  are  issued  for  only  eighty  per  cent  of  the 
par  value  of  these  bonds.  The  lowest  denomina- 
tion is  five  dollars.  These  notes  specify  that  they 
are  payable  in  gold  money  of  the  United  States 


NATIONAL  BANK  NOTES  153 

on  presentation  at  the  office  of  the  issuing  bank. 
National  gold  associations  must  keep  a  reserve 
of  twenty-five  per  cent  of  their  outstanding  cir- 
culation in  gold  and  silver  coin.  In  1910  there  was 
only  $75,000  of  gold  national  bank  certificates 
outstanding,  so  it  is  apparent  that  gold  banks  are 
not  popular,  and  it  is  easy  to  see,  from  the  re- 
quirements, why  they  would  not  ordinarily  be  so. 

II 

The  national  bank  currency  has  been  severely 
criticized  time  and  again.  The  old  saying  is  that 
it  will  expand  under  certain  arbitrary  and  artifi- 
cial conditions  and  will  contract  in  the  same  way. 
The  charge  is  that  it  does  not  expand  naturally 
—  responding  to  industrial  and  agricultural  de- 
mands; nor  contract  naturally  —  when  these  de- 
mands are  satisfied.  It  has  been  pointed  out  time 
and  time  again  that  there  is  no  inevitable  rela- 
tion between  the  needs  of  the  season  and  the  sup- 
ply of  currency.  This  irregularity  has  in  effect 
made  our  financial  panics  more  disastrous  and 
enduring  than  they  would  have  otherwise  been. 

The  great  depression  of  1907-08  served  to 
bring  the  matter  to  a  head.  On  May  30,  1908, 
along  with  the  passage  of  the  bill  which  created 
national  currency  associations  (described  below), 
a  National  Monetary  Commission  was  authorized 
which  was  required  "to  inquire  into  and  report 
to  Congress,  at  the  earliest  date  practicable,  what 
changes  are  necessary  or  desirable  in  the  mone- 
tary system  of  the  United  States." 

This  Commission,  which  was  composed  of  some 
of    the    most    distinguished    men    in    Congress, 


154  PRACTICAL  BANKING 

planned  and  executed  an  investigation  of  mone- 
tary conditions  all  over  the  world  and  published 
reports  and  papers  by  experts  which  ran  to  sixty 
volumes  and  pamphlets.^ 

In  January  1912,  the  Commission,  through 
Senator  Aldrich,  its  chairman,  reported  its  labors 
complete  and  submitted  a  plan  for  a  great  na- 
tional clearing  house,  tobe  known  as  the  National 
Reserve  Association.  The  plan  would  have,  in 
general,  given  unity  and  centralization  to  the 
enactment  of  1908  described  below.  It  was  never 
enacted  into  law.^ 

One  of  the  great  collection  of  publications  of 
the  Commission  is  of  particular  interest  here.  It 
is  a  monograph  by  Mr.  Alexander  D.  Noyes,  on 
the  History  of  the  National  Bank  Currency. 

In  this  pamphlet  Mr.  Noyes  has  very  clearly 
shown  what  we  have  mentioned  above,  namely, 
that  the  expansion  and  contraction  of  the  na- 
tional bank  currency  does  not  inevitably  reflect 
agricultural  and  industrial  demands.  In  fact,  he 
states  that,  so  far  from  moving  in  the  same  direc- 

^  The  personnel  of  the  Commission  was  as  follows:  Nelson  W. 
Aldrich,  Rhode  Island,  chairman;  Edward  B.  Vreeland,  New  York, 
vice-chairman;  William  B.  Allison,  Iowa;  Julius  C.  Burrows,  Michi- 
gan; Eugene  Hale,  Maine;  Philander  C.  Knox,  Pennsylvania;  Theo- 
dore E.  Burton,  Ohio;  John  W.  Daniel,  Virginia;  Henry  M.  Teller, 
Colorado;  Hernando  D.  Money,  Mississippi;  Joseph  W.  Bailey, 
Texas;  Frank  P.  Flint,  California;  James  P.  Taliaferro,  Florida; 
Boies  Penrose,  Pennsylvania;  James  Overstreet,  Indiana;  John  W. 
Weeks,  Massachusetts;  Robert  W.  Bonynge,  Colorado;  Sylvester  C. 
Smith,  California;  Lemuel  P.  Padgett,  Tennessee;  George  P.  Bur- 
gess, Texas;  Arsene  P.  Pujo,  Louisiana;  George  W.  Prince,  Illinois; 
James  McLachlan,  California. 

^  The  suggested  remedy  of  the  National  Monetary  Commission  will 
be  discussed  more  fully  in  chapter  xx,  dealing  with  the  steps  which 
finally  led  up  to  the  passing  of  the  Owen-Glass  Currency  Bill  in  191d 


NATIONAL  BANK  NOTES  155 

tion  as  trade,  bank-note  circulation  is  likely  to 
operate  in  an  exactly  opposite  direction. 

He  shows  that  the  operation  which  requires 
an  expansion  of  currency  tends  to  make  national 
bank  notes  scarce.  For  instance,  we  have  a  year 
of  great  prosperity  and  trade  activity.  There 
must  be  an  expansion  in  national  bank  notes;  it 
means  the  purchase  of  bonds  by  the  banks.  The 
same  prosperous  condition  fills  the  Federal 
Treasury  to  overflowing,  and  consequently,  the 
Government  reduces  its  debt  by  buying  up  its 
bonds.  This  raises  the  price  and  discourages  the 
buying  for  purposes  of  security  on  circulation.  In 
1879  the  government  debt  was  $1,797,000,000. 
Beginning  then,  under  piping  times  of  prosperity, 
it  redeemed  its  debt  until,  in  1887,  this  was  $1,- 
021,000,000,  and  in  1892  was  reduced  to  only 
$585,000,000.  The  result  was  that  bonds  which 
sold  for  99  in  1879  sold  for  121f  in  1882.  Banks 
were  tempted  to  sell  and  make  the  profit;  also  to 
abstain  from  buying,  at  these  tip-top  prices,  for 
circulation  purposes.  This  condition,  together 
with  a  large  amount  of  "Government  3's"  which 
were  called  by  the  Treasury,  caused  the  national 
bank  issue  to  fall  from  $361,800,000,  in  1883,  to 
$296,500,000  in  1886.  In  1891  the  issue  was  only 
$167,577,000.  And  this  was  at  a  period  when  the 
growth  of  the  country  demanded  a  large  amount 
of  currency.  In  fact,  in  a  nutshell,  the  use  for 
money  for  purposes  of  trade,  evidenced  by  the 
amount  of  exchanges  in  the  clearing  houses,  be- 
tween 1883  and  1891  increased  fifty -four  per 
cent,  while  national  bank  currency  actually  de- 
creased fifty- three  per  cent. 


156  PRACTICAL  BANKING 

On  the  other  hand,  as  Mr.  Noyes  goes  on  to 
show,  the  same  inconvenience  was  experienced 
when  a  decrease  in  currency  was  natural.  The 
crash  of  1893  brought  down  the  prices  of  bonds; 
the  Government,  in  financial  straits,  issued  $100,- 
000,000  in  new  bonds.  They  were  bought  largely 
by  national  banks,  because  the  low  price  made 
them  attractive  circulation  investments,  and  they 
were  used  as  a  basis  for  additional  currency.  And 
this  at  a  time  when  clearing-house  exchanges 
showed  a  large  decrease.^  So  that  between  1892 
and  1894  trade  activity  had  decreased  twenty 
six  per  cent,  while  bank  notes  had  increased 
eighteen  per  cent.^ 

Mr.  Noyes  concludes  that  there  is  no  "remedy 
for  this  abnormal  situation  except  the  substitu- 
tion of  some  other  system  for  that  which  pre- 
scribes the  United  States  government  bond  as  a 
basis  for  bank-note  issues." 

This  pamphlet  was  written  in  1910.  In  1908 
a  patchwork  system  had  been  adopted  which,  it 
was  hoped,  might  tend  to  avert  any  return  of  the 
catastrophe  of  1907. 

This  system  was  outlined  and  provided  for  in 
the  so-called  Aldrich-Vreeland  Act  of  May  30, 
1908,  aiming  to  give  relief  to  the  currency  strin- 

*  See  chapter  on  "The  Clearing  House."  Also  the  section  ia 
chapter  xix,  on  the  crisis  of  1893. 

''■  I  suppose,  as  a  matter  of  fact,  that  this  increase  in  bank  notes 
would  relieve  the  stringency  and  make  money  easier  to  obtain.  But 
the  diflSculty  is,  the  flood  of  money  does  not  come  till  ajter  the  panic, 
which  is  too  bad.  Also,  in  normal  times,  when  trading  is  dull  from 
no  reason  such  as  a  panic,  the  tendency  would  be  to  increase  the 
bank-note  issue,  which,  in  turn,  would  encourage  risky  lending.  At 
any  rate,  I  think  Mr.  Noyes  makes  out  his  case  very  well.  The  old 
national  bank  notes  certainly  do  not  respond  to  natural  demands. 


4 


NATIONAL  BANK  NOTES  157 

gency  during  certain  parts  of  the  year  and  during 
panics  by  the  estabhshment  of  national  cur- 
rency associations.  The  main  provisions  of  this 
act  endeavored  to  create  an  elastic,  emergency 
currency,  to  be  issued  on  other  security  than 
United  States  bonds,  and  to  be  retired  as  soon  as 
the  "tightness"  of  the  situation  had  blown  over.^ 

A  national  currency  association,  for  the  issu- 
ance of  additional  circulating  notes,  may  be 
formed  by  not  less  than  ten  national  banks,  each 
having  an  unimpaired  capital  and  a  surplus  of  at 
least  twenty  per  cent  of  its  capital.  But  the  ag- 
gregate capital  and  surplus  of  the  currency  asso- 
ciation is  not  to  be  less  than  $5,000,000.  The 
association  can  be  formed  in  one  State,  in  parts 
of  one  State,  or  in  contiguous  parts  of  more  than 
one  State.  Any  bank  within  a  certain  territory, 
having  the  necessary  qualifications  for  member- 
ship, cannot  be  denied  the  rights  and  privileges 
of  the  association  in  that  territory. 

In  each  of  these  associations  there  is  a  board 
consisting  of  one  member  from  each  of  the  asso- 
ciate banks.  This  board  has  the  general  manage- 
ment of  the  association,  and,  for  its  control, 
passes  rules,  not  repugnant  to  law.  It  also  elects 
a  president,  vice-president,  secretary,  treasurer, 
and  executive  committee  of  five  or  more  members. 
The  executive  committee  transacts  the  duties  of 
the  general  board,  except  those  of  electing  officers 
and  executive  committee,  and  of  passing  by-laws. 
The  withdrawal  of  any  bank  from  the  associa- 
tion does  not  affect  its  existence  unless  the  num- 

*  The  tax,  which  would  force  retirement  of  these  notes  as  soon  as 
the  stringency  was  past,  is  mentioned  on  page  141. 


158  PRACTICAL  BANKING 

ber  of  affiliated  banks  is  thereby  reduced  below 
ten. 

Any  bank  which  is  a  member  of  a  national 
currency  association  may  apply  through  the  asso- 
ciation to  the  Treasury  Department  for  additional 
currency,  to  be  based  on  securities  other  than 
United  States  bonds,  including  commercial  paper. 
Commercial  paper  here  means  notes  "represent- 
ing actual  commercial  transactions,  which  when 
accepted  by  the  association  shall  bear  the  names 
of  at  least  two  responsible  parties  and  have  not 
exceeding  four  months  to  run." 

When  such  security  is  deposited  with  the  cur- 
rency association,  it  makes  application  to  the 
Comptroller  of  the  Currency,  who,  after  consult- 
ing the  Secretary  of  the  Treasury,  issues,  if  con- 
ditions warrant  it,  an  amount  of  circulating  notes 
in  a  certain  proportion  to  the  cash  value  of  the 
securities,  not,  however,  to  exceed  seventy-five 
per  cent  in  the  case  of  commercial  paper  or  ninety 
per  cent  in  the  case  of  state,  county,  or  municipal 
bonds.  The  currency  associations  take  charge  of 
these  securities  for  the  United  States. 

The  total  assets  of  the  several  banks  in  each 
association  are  liable  for  the  redemption  of  the 
notes  issued  by  any  of  its  members,  but  each  only 
in  the  proportion  that  its  capital  and  surplus 
bears  to  the  total  capital  and  surplus. 

The  association  may  at  any  time  require  of  any 
bank  more  or  other  securities  to  cover  its  addi- 
tional circulation,  and  if,  on  ten  days'  notice,  this 
order  has  not  been  complied  with,  the  associa- 
tion may  sell  the  securities  and  apply  the  pro- 
ceeds to  the  redemption  of  its  notes. 


NATIONAL  BANK  NOTES  159 

If,  for  any  reason,  it  is  impracticable  for  a  bank 
to  be  a  member  of  a  national  currency  associa- 
tion, under  certain  conditions  it  is  not  deprived  of 
the  right  to  issue  additional  notes.  If  it  has  a 
surplus  equal  to  twenty  per  cent  of  its  capital 
stock,  it  can  make  application  to  the  Comp- 
troller of  the  Currency  for  additional  currency  to 
be  based  on  bonds  other  than  those  of  the  United 
States  Government.  In  this  case  securities  eligi- 
ble for  additional  circulation  are  state  bonds  and 
interest-bearing  obligations  of  any  county,  town, 
or  city  which  has  been  in  existence  for  ten  years 
past  and  has  not  defaulted  in  the  payment  of  its 
obligations. 

The  five  per  cent  redemption  fund  applies  to 
additional  currency  issue  as  it  does  to  the  regular 
bond-secured  currency.  It  was  originally  pro- 
vided that  there  should  at  no  time  be  more  than 
$500,000,000  of  additional  circulating  notes  out- 
standing, but  an  amendment  passed  August  4, 
1914,  provided  that  each  bank  might  issue  addi- 
tional circulating  notes  to  an  amount  equal  to 
125  per  cent  of  its  unimpaired  capital  and  sur- 
plus. This  increased  the  possible  issue  to  about 
$1,760,000,000. 

This  act  was  to  expire  in  1914,  but  the  Federal 
Reserve  Act  extended  it  to  June  30,  1915.  Under 
it,  up  to  August  22,  1913,  twenty  associations 
were  formed  with  over  $675,000,000  capital  and 
surplus.  During  the  financial  stringency  of  the 
summer  and  fall  of  1914,  the  provisions  of  the  act 
were  beneficent,  in  that  a  panic  was  avoided  and 
business  was  "  tided  over"  until  the  establishment 
of  the  Federal  Reserve  Banks  could  be  effected. 


160  PRACTICAL  BANKING 

The  great  difficulties  with  this  scheme  seem  to 
be:  (1)  that  it  lacked  centralization,  and  therefore 
could  not  be  uniform  in  its  operation  nor  public 
in  its  control;  (2)  that  it  exhibited  much  of  the 
old  super-cautiousness  of  the  national  bank  note 
based  on  United  States  bonds;  and  (3)  that  it 
made  no  provision  for  the  protection  of  the  coun- 
try's gold  reserve.  But  it  was,  after  all,  only  in- 
tended as  a  makeshift,  put  together  to  safeguard 
the  country's  financial  interests  during  a  period 
in  which  something  satisfactory,  constructive, 
and  lasting  was  produced. 


CHAPTER  XVII 

THE  CLEARING  HOUSE 


Some  time  ago  the  writer  asked  a  business 
friend  for  his  definition  of  a  clearing  house.  He 
said  that  he  understood  it  to  be  a  place  where 
associated  banks  exchanged  checks  drawn  against 
each  other  and  paid  or  collected  the  balances  in 
money.  That  is  about  what  any  man,  not  in  the 
banking  business,  would  say.  As  a  general  defi- 
nition it  is  very  good.  Yet  there  are  some  func- 
tions which  the  clearing  house  assumes  and  some 
points  of  interest  in  its  mechanism  which  may  be 
suggested  with  profit.  Indeed,  the  most  important 
features  of  the  clearing  house  are  not  suggested 
at  all  in  the  average  business  man's  rule. 

A  very  simple  and  sufficient  definition  for  the 
clearing  house  in  its  primary  functions  is  "an 
association  of  banks  and  bankers  in  some  partic- 
ular locality,  organized  for  the  mutual  exchange 
of  checks,  drafts,  and  other  instruments  which 
may  be  agreed  upon.  Settlement  for  the  differ- 
ence between  the  aggregate  of  items  delivered 
and  the  aggregate  of  items  received  is  usually 
paid  and  received  in  cash  or  in  some  form  of  certif- 
icate which  the  banks  accept  among  themselves 
as  cash." 

In  many  cities  and  towns  the  clearing  house 
has  not  accomplished  more  than  such  simple 
functions.    But  in  New  York  and  Chicago,  and 


162  PRACTICAL  BANKING 

in  many  smaller  cities,  its  scope  has  widened 
until  it  has  become  an  active  means  of  general 
cooperation  among  the  banks  composing  it. 

Mr.  James  G.  Cannon,  in  his  article  on  the 
clearing  house,  says:  ^ 

But  we  must  go  further  than  this;  for,  though  origi- 
nally designed  as  a  labor-saving  device,  the  clearing 
house  has  expanded  far  beyond  those  limits,  until  it 
has  become  a  medium  for  united  action  among  the 
banks  that  did  not  exist  even  in  the  imagination  of 
those  who  were  instrumental  in  its  inception.  A  clear- 
ing house,  therefore,  may  be  defined  as  a  device  to 
simplify  and  facilitate  the  daily  exchanges  of  items  and 
settlements  of  balances  among  banks,  and  a  medium 
for  united  action  upon  all  questions  affecting  their 
mutual  welfare.  .  .  .  The  tendency  has  been  marked, 
especially  in  recent  years,  to  include  within  the  legiti- 
mate field  of  clearing  houses  all  questions  affecting  the 
mutual  welfare  of  the  banks  and  the  community  as  a 
whole.  The  bankers  west  of  the  Mississippi  have 
given  to  the  country  the  most  striking  examples  of  the 
possibilities  of  clearing  houses  exercising  various  spe- 
cial functions,  while  the  great  associations  of  the  East, 
and  especially  that  of  New  York,  have  exemplified  the 
utility  and  value  of  the  clearing-house  loan  certificate. 

As  has  been  intimated,  the  clearing  houses  may 
be  divided,  in  regard  to  the  mode  of  settlement 
for  balances,  into  two  types:  first,  those  whose 
members  make  settlement  in  cash  or  some  sub- 
stitute for  cash,  agreed  upon  by  them;  and  sec- 
ond, those  whose  members  may  settle  their  bal- 
ances with  checks  on  large  banking  centers.  And 
it  should  be  noted  that  there  are  two  classes  of 

*  Columbia  University  Lectures  on  the  Currency  Problem,  1908. 


THE  CLEARING  HOUSE  163 

clearing  houses  in  respect  to  the  functions  which 
they  perform;  namely,  those  which  simply  offer 
a  means  of  exchanging  items,  and  those  which, 
in  addition,  have  the  control  of  certain  matters 
pertaining  to  the  common  welfare  of  all. 

New  York  has  the  most  perfectly  developed 
clearing  house  in  the  country,  showing  every 
phase  of  progress  in  that  direction.^  In  this  sketch 
we  shall  deal  specifically  with  it,  contenting  our- 
selves with  a  casual  remark  on  other  associations. 

The  New  York  clearing  room  is  a  large  square 
chamber  in  a  beautiful  white  stone  building  oc- 
cupied jointly  by  the  Clearing  House  and  the 
Chase  National  Bank.  Across  one  side  and  ele- 
vated some  fifteen  feet  is  the  manager's  gallery, 
where  he  supervises  the  making  of  exchanges. 
Four  long  lines  of  standing  desks  run  up  to  this 
end  of  the  chamber.  Between  each  two  lines  there 
are  a  screen  and  coat  rack. 

The  exchanges  are  made  at  ten  o'clock  in  the 
morning  of  each  business  day.  A  few  minutes 
before  the  hour  the  messengers  from  the  several 
banks  begin  arriving.  Each  member  sends  a  de- 
livery messenger  who  brings  the  items  against  the 
other  banks,  and  a  settling  clerk,  with  frequently 
an  assistant,  who  receives  the  exchanges  from  the 
other  banks  and  remains  till  a  proof  is  made  of  the 
clearing. 

When  he  arrives  at  the  Clearing  House,  every 
settling  clerk  furnishes  the  proof  clerk  in  the  gal- 
lery with  a  ticket  showing  the  amount  brought  to 
the  clearing.   This  is  entered  on  the  clearing  bal- 

1  If  we  except  clearing  house  foreign  departments,  which  are  dis- 
cussed later  in  this  chapter. 


164  PRACTICAL  BANKING 

ance  sheet  as  a  credit  to  the  bank.  This  column 
for  credits,  together  with  one  for  credit  balances, 
constitutes  one  side  of  the  balance. 

The  delivery  clerks  come  in  with  huge  boxes 
and  bags  filled  with  their  bank's  items  against 
its  fellow  members.  The  items  on  each  bank  are 
done  up  in  a  separate  package,  upon  the  outside 
of  which  there  is  a  list  showing  the  amount  con- 
tained. 

At  9.59  the  manager,  having  shortly  before 
entered  the  gallery,  strikes  a  bell  as  a  signal  for 
the  messengers  to  be  in  readiness  to  clear.  Every 
settling  clerk  takes  his  desk,  with  an  assistant 
usually  at  his  side,  and  each  delivery  messenger 
stations  himself,  box  of  items  in  hand,  in  front  of 
his  settling  clerk's  desk.  At  precisely  ten  o'clock 
a  second  bell  is  struck  and  the  delivery  messen- 
gers start  moving  in  a  steady  line,  beginning  with 
the  desk  next  to  their  own,  where  they  leave  the 
proper  package,  receive  the  initial  of  the  settling 
clerk  on  their  clearing  slip,  and  deposit  a  ticket 
in  the  desk  showing  the  amount  of  the  package 
delivered.  Thus,  in  regular  rotation,  they  move 
around  the  room  and,  in  seven  or  eight  minutes, 
arrive  again  at  their  starting-points.  They  now 
take  over  the  items  received  by  their  settling 
clerks,  pack  them  away  in  their  bags,  and  depart 
for  their  respective  banks. 

As  soon  as  all  deliveries  are  made,  the  settling 
clerks  check  back  their  debit  slips  —  the  slips  on 
which  they  have  recorded  the  amounts  of  checks 
delivered  to  them  —  with  the  tickets  deposited 
by  the  several  delivery  messengers.  Now,  they 
foot  up  their  debit  slips  and  transfer  the  totals  of 


THE  CLEARING  HOUSE  165 

the  items  delivered  and  received  to  another 
ticket,  finding  the  balance,  which  they  mark 
"debit"  or  "credit"  as  the  case  may  be.  These 
tickets  are  passed  up  to  the  proof  clerk  in  the 
gallery,  who  enters  the  total  debit  on  the  left  side 
of  his  proof-sheet  by  the  bank's  name,  and  the 
debit  or  credit  balance  on  the  appropriate  side  of 
his  sheet.  Next  he  proceeds  to  add,  in  order  to 
see  that  the  debit  side  exactly  offsets  the  credit. 
In  a  few  minutes  he  is  ready  to  announce  whether 
a  balance  has  been  reached  or  not.  If  it  has,  the 
clerks  are  at  liberty  to  leave.  Otherwise,  they 
must  remain  till  the  error  is  discovered. 

In  case  of  misbalance,  the  settling  clerk  may 
have  copied  down  the  wrong  total  from  some 
package  as  it  was  delivered  to  him.  In  this  event 
he  probably  locates  it  in  rechecking  his  work  with 
the  slips  left  in  his  desk  by  the  several  delivery 
clerks.  On  the  other  hand,  the  proof  clerk  may 
have  erred  in  transcribing  to  his  book  the  amounts 
from  the  tickets  handed  him.  He  rechecks  and 
can  readily  tell  whether  the  error  has  been  com- 
mitted by  him.  It  is  possible,  of  course,  to  make 
purely  mathematical  errors  in  adding  up  the  dif- 
ferent sheets.  This  ought  to  happen  rarely,  and 
ought  to  be  easily  found,  though  the  writer  re- 
calls an  instance  where  it  was  otherwise.  One  of 
the  settling  clerks  in  a  smaller  clearing  house 
invariably  made  an  error  in  footing  up  his  debit 
sheet.  The  singular  part  of  it  was  that  he  was 
rarely  able  to  find  the  error  himself,  and,  after 
hastily  going  over  his  figures,  would  sit  back  com- 
placently and  wait  for  one  of  the  other  clerks  to 
locate  it.    After  a  few  minutes  of  consternation 


166  PRACTICAL  BANKING 

and  surprise,  one  of  the  clerks  would  suggest  that 
some  one  go  over  this  fellow's  figures.  In  a  mo- 
ment or  two  the  difference  would  be  found.  As 
there  was  a  fine  attached  for  errors,  the  bank  send- 
ing this  man  soon  discovered  that  it  was  conven- 
ient to  replace  him. 

In  cities  where  every  minute  is  valuable  to 
banks,  especially  about  the  clearing  hour,  it  is 
imperative  that  clerks  arrive  at  the  clearing 
house  promptly.  Most  cities  impose  a  fine  for 
tardiness.  New  York  sets  this  fine  at  two  dollars. 

It  is  obviously  improbable  that  any  bank's 
credits  will  offset  exactly  its  debits.  In  the  New 
York  Clearing  House's  history  it  has  not  hap- 
pened once,  though  at  one  time  an  exact  balance 
was  only  missed  by  ten  cents.  Every  bank  carries 
back  items  in  aggregate  amount  more  or  less  than 
it  brings;  that  is,  it  has  a  debit  or  credit  balance 
after  the  exchange  of  items.  Of  course,  the  total 
debits  of  the  Clearing  House  will  just  equal  the 
total  credit  balances.  By  1.30  p.m.  each  debtor 
bank  has  paid  to  the  Clearing  House  the  amount 
of  its  debit  balance,  and  has  received  a  receipt 
for  the  same  from  an  appropriate  officer.  Then 
the  creditor  banks  receive  payment  for  the 
amount  of  their  credit  balances.  But  no  money 
is  paid  to  creditor  members  until  every  debit  bal- 
ance has  been  paid  in. 

This  is  a  precautionary  measure.  For  suppose 
that  all  save  one  bank  had  paid  in  their  debits, 
and  all  of  this  had  been  paid  to  creditor  banks  as 
they  came.  It  is  obvious  that  some  bank  or  banks 
would  not  have  received  their  credits.  Now,  sup- 
pose the  delinquent  bank  should  suddenly  dis- 


THE  CLEARING  HOUSE  167 

cover  its  inability  to  pay  its  debit.  All  save  one 
or  two  members  received  their  balances  all  right. 
Those  one  or  two,  however,  must  stand  to  lose 
their  credits  entirely,  since  it  would  be  hard  to 
find  any  of  the  others  so  philanthropic  as  to  de- 
sire to  divide  their  credits  with  them.  Under  New 
York's  system  no  such  occurrence  could  take 
place. 

In  some  cities  where  the  clearing  houses  are 
smaller  and  where  the  proximity  of  the  banks 
makes  it  practicable,  the  clearing-house  manager 
writes  checks  in  favor  of  creditor  banks  for  their 
exact  balances  and  drawn  against  debtor  banks 
in  just  the  amount  necessary  to  cover  their  bal- 
ances. These  checks  are  subsequently  collected 
in  cash  or  sent  through  the  clearing  on  the  fol- 
lowing day.  This  plan  necessitates  the  "splitting- 
up"  of  debits  and  credits  which  would,  in  a  large 
city  like  New  York  or  Chicago,  cause  much  in- 
convenience in  the  collection.  This  plan  has  the 
same  disadvantages  that  the  New  York  plan 
would  have  if  any  creditor  was  paid  before  all 
debtors  had  settled.  But  it  permits  a  cheaper 
means  of  conducting  the  clearing-house  exchanges. 

In  New  York  the  following  are  recognized  as 
media  for  paying  and  receiving  clearing  balances : 
except  for  fractional  amounts  —  legal  tender 
notes,  gold.  United  States  or  Clearing  House 
gold  certificates,  or  (in  times  of  financial  strin- 
gency) Clearing  House  loan  certificates. 

Now,  what  has  happened?  Fifty  banks  from 
many  parts  of  the  city  have  gathered  in  the  clear- 
ing room  with  packages  containing  items  against 
each  other.  They  have  made  the  exchanges,  each 


168  PRACTICAL  BANKING 

taking  what  it  is  listed  with  and  leaving  what  it 
has  listed  against  the  others.  Hundreds  of  mil- 
lions of  dollars  of  credit  have  been  exchanged 
and  only  about  five  per  cent  —  in  fact  only  the 
balances  —  have  been  transferred  in  cash.  The 
Clearing  House's  operation  saves  much  time  and 
expense.  It  provides  for  the  deliberate  verifica- 
tion of  the  checks  as  to  signatures,  dates,  amounts, 
and  indorsements.  All  checks  which  a  bank  de- 
cides not  to  pay,  either  for  lack  of  funds,  because 
of  payment  ordered  stopped,  or  because  of  in- 
formality of  signature,  are  returned  by  messen- 
ger to  the  bank  which  sent  them.  All  checks  not 
accepted  purely  for  lack  of  indorsement  are  certi- 
fied and  returned  through  the  clearing  the  next 
day  to  the  bank  by  which  presented.  When  they 
are  properly  indorsed,  they  may  again  be  sent 
through  the  clearing  and  in  due  order  paid. 

The  New  York  Clearing  House  is  in  its  sixty- 
first  year.  It  is  composed  of  thirty-two  national 
banks,  eighteen  state  banks,  and  the  Assistant 
Treasurer  at  New  York.  Besides  these  there  are 
thirty-odd  banks  and  trust  companies  which 
make  their  exchanges  through  members  of  the 
association.  When  the  organization  began  its 
operations  in  1853  it  had  just  fifty  members.  This 
number  has  fluctuated,  falling  as  low  as  forty-six 
and  reaching  as  high  as  sixty-seven.  All  members 
of  the  association  must  keep  a  reserve  of  twenty- 
five  per  cent.^ 

The  association's  officers  are  a  president,  a 
secretary,  a  manager,  and  an  assistant  mana- 

^  This  provision  has  been  revised  in  accordance  with  the  Fed> 
eral  Reserve  Act. 


THE  CLEARING  HOUSE  169 

ger.  The  following  are  the  standing  committees : 
the  Clearing-House  Committee,  the  Conference 
Committee,  the  Nominating  Committee,  the 
Committee  on  Admissions,  and  the  Arbitration 
Committee. 

For  the  year  1909  the  average  daily  transac- 
tions were  $340,303,113.28,  of  which  $326,505,- 
468.45  was  in  exchanges  and  $13,797,644.83  in 
balances.  In  the  first  full  year  of  its  organiza- 
tion (1854)  the  average  daily  transactions  were 
$20,092,583.00,  of  which  $19,104,504.94  was  ex- 
changes and  $988,078.06  balances. 

The  largest  day  on  record  was  January  3,  1906, 
when  the  total  transactions  amounted  to  $712,- 
467,035.83.  The  largest  balances  (paid  in  cash, 
of  course)  were  on  October  3,  1905,  when  they 
came  to  $42,331,709.02.  The  total  transactions 
since  the  Clearing  House's  inception  are  (to  1909) 
$2,123,395,038,959.60.  The  total  balances  paid 
into  the  Clearing  House  during  the  year  1909 
were  $4,194,484,028.37.  They  were  made  as  fol- 
lows :  — 

United  States  bearer  gold  certificates $1,292,304,000.00 

United  States  order  gold  certificates 555,140,000.00 

Clearing  House  gold  certificates 1,831,410,000.00 

Clearing  House  note  depository  certifi- 
cates for  — 

legal  tenders 8,595,000.00 

gold  certificates 11,145,000.00 

silver  certificates 11,210,000.00 

United  States  legal  tenders  and  change  . .  184,080,028.37 


$4,194,484,028.37 


'  From  Mr.  William  Shcrer's  Report  for  1909.   Mr.  Sherer  i.s  the 
third  incumbent  in  the  office  of  manager  of  the  New  York  Clearing 


170  PRACTICAL  BANKING 

II 

We  may  now  proceed  to  discuss  the  more  spe- 
cial functions  of  the  clearing  house.  It  may  be 
said  to  have  the  following  special  facilities  in  its 
most  highly  developed  form :  — 

(1)  Making  loans  to  the  Government  in  time 
of  need. 

(2)  Fixing   uniform   exchange   and   collection 

House,  and  has  honorably  discharged  his  duties  since  1892.  The 
writer  remembers  most  pleasantly  two  days  spent  in  the  Clearing 
House  under  the  kind  courtesies  of  Mr.  Sherer. 

Attention  must  here  be  called  to  a  scheme  in  operation  in  Boston 
whereby  checks  received  by  clearing-house  members  on  some  six 
himdred  banks  throughout  New  England  are  handled  by  clearing- 
house facilities.  The  results  of  this  plan  have  been  highly  successful 
since  its  establishment  in  1900,  the  yearly  totals  averaging  about 
$575,000,000.  The  cost  of  collecting  "foreign"  checks  in  this  way 
has  been  approximately  seven  cents  per  one  thousand  dollars.  At- 
lanta, Georgia,  and  Kansas  City,  Missouri,  also  conduct  a  "foreign 
department"  in  their  clearing  houses. 

The  best  account  of  the  scope  and  possibilities  of  clearing  houses, 
an  economic  expedient  as  well  as  an  institution  of  local  convenience, 
is  to  be  found  in  the  volume.  Clearing  Houses,  by  Mr.  James  G. 
Cannon,  vice-president  of  the  Fourth  National  Bank,  New  York. 
It  is  published  in  the  National  Monetary  Commission  Series.  The 
volume  is  clear  and  complete;  it  is  abundant  in  specific  illustrations 
taken  from  clearing  houses  in  every  part  of  the  country.  Mr.  Cannon 
realizes  that  it  is,  strictly  speaking,  impossible  to  generalize  very 
satisfactorily  on  the  subject,  because  clearing  houses  have  grown  up 
spontaneously  in  various  cities  and  often  without  reference  to  any 
particular  model.  At  the  same  time  it  is  important  to  note  that 
there  is  a  growing  "class  consciousness"  among  clearing  houses; 
that  is,  they  are  beginning  to  realize  the  existence  of  a  sort  of  affinity 
between  themselves.  They  are  studying  each  other's  methods  and 
imitating  good  qualities.  The  result  is  the  awakening  of  a  spirit  of 
cooperation  between  clearing  houses.  This  is  cleverly  outlined  and 
new  functions  consequently  suggested  in  chapter  iv  of  Clearing 
Houses,  cited  above.  Mr.  Cannon's  own  lucid  expositions  of  the 
duties  and  privileges  of  clearing-house  associations  and  his  very 
large  collection  of  exact  data  for  comparison  have  contributed  con- 
spicuously to  the  development  of  "clearing-house  consciousness." 


THE  CLEARING  HOUSE  171 

charges ;  also  regulating  the  rate  of  interest 
which  its  members  may  pay  on  deposits. 

(3)  Mutual  assistance  of  its  members. 

(4)  Issue  of  clearing-house  loan  certificates. 

(5)  Issue  of  certificates  in  form  of  checks  on  its 
members  for  general  circulation. 

(1)  During  the  Civil  War,  the  clearing  houses 
of  the  great  Eastern  cities  came  to  the  assistance 
of  the  embarrassed  Government  and  helped 
finance  the  struggle  for  the  preservation  of  the 
Union.  It  is  even  possible  that  the  war  might 
have  been  a  failure  but  for  the  support  of  these 
associations.  It  is  not  the  purpose  of  this  para- 
graph to  inquire  as  to  whether  patriotic  or  eco- 
nomic motives,  or  both,  moved  the  clearing 
houses  to  this  action,  but  only  to  point  out  the 
wide  potentialities  of  such  associations  to  the 
Government  in  a  time  of  public  financial  embar- 
rassment. 

(2)  In  many  cities  prescribing  the  rate  of  ex- 
change charged  for  handling  out-of-town  checks 
has  seemed  to  come  within  the  province  of  the 
clearing  house.  In  these  places  it  has  proved  a 
source  of  protection  for  the  members,  though  it 
is  argued  that  it  keeps  a  certain  amount  of  busi- 
ness from  such  cities.  Some  clearing  houses  also 
regulate  rates  charged  on  collections.  New  York 
has  such  an  arrangement.  Her  rates  vary  from 
par  to  one  tenth  and  one  fourth  per  cent  on  items 
drawn  on  the  United  States  or  Canada.  The 
penalty  for  violation  of  this  ruling  is  a  fine  of 
five  thousand  dollars  for  the  first  ofi'ense  and 
possible  expulsion  from  the  clearing  house  for 
second  offense.   As  to  fixing  the  rate  of  interest 


172  PRACTICAL  BANKING 

payable  on  deposits,  clearing  houses  have  not 
been  so  successful  as  might  be  expected.  Some 
associations,  usually  in  the  smaller  cities,  have 
been  able  to  regulate  this,  with  the  result  that  it 
has  been  highly  satisfactory  to  all  concerned.  The 
difficulty  has  not  been  altogether  the  lack  of  sup- 
port of  clearing-house  members,  but  the  fact  that 
banks  outside  the  association  have  waged  un- 
relenting warfare  on  the  members  by  offering 
higher  rates  than  have  been  agreed  upon  in  the 
clearing  house.  ^ 

(3)  In  times  of  financial  anxiety  and  unrest  it 
often  happens  that  a  perfectly  solvent  bank  is 
temporarily  embarrassed.  It  may  be  because  of 
some  malicious  or  careless  rumor;  it  may  be  be- 
cause of  the  sudden  calling-in  of  a  large  block  of 
loans  to  cover  some  unlooked-for  demand  which 
excites  the  suspicion  of  the  over-wary.  But,  be 
the  cause  what  it  may,  the  depositors  are  panic- 
stricken  and  stampede  the  bank  to  withdraw  their 
funds.  If  the  run  is  uninterrupted  by  a  reestab- 
lishment  of  the  customers'  confidence,  the  bank 
may  speedily  find  itself  in  an  exceedingly  embar- 
rassed position,  unable  to  extend  any  loans,  un- 
able to  redeem  checks  against  accounts  on  its  own 
books.  This  may  not  reflect  on  the  bank,  since  it 
is  impossible  to  think  of  carrying  an  amount  of 
cash  anywhere  near  equaling  the  deposit  liabili- 
ties of  the  bank.  The  banker  could  not  afford  to 
lock  up  his  total  deposits  in  his  vaults,  even  if  he 
were  able  to  turn  all  the  resources  representing 
deposits  into  cash,  which,  in  a  system  based  as 
much  on  credit  as  ours,  is  impracticable.   He  has 

^  See  James  G.  Cannon,  Clearing  Houses,  p.  14. 


THE  CLEARING   HOUSE  173 

to  calculate  as  accurately  as  possible  the  probable 
demand  for  cash  and  invest  the  remainder  as 
safely  and  profitably  as  he  can.  To  be  sure,  he 
should  very  much  limit  the  long-time  paper,  and 
should  arrange  to  have  a  constant  stream  of  re- 
payments flowing  into  the  bank.  But  in  case  of 
an  unforeseen  run,  the  bank's  assets  cannot  al- 
ways be  converted  quickly  enough  to  supply  the 
demands  made  upon  it.  Yet,  when  it  is  in  good 
standing,  its  clearing-house  associates  are  usually 
willing  to  assist  it  over  the  rough  place.  This  ac- 
tion is  not  without  its  selfish  side,  for  the  "easing- 
up"  of  the  panicky  fever  among  depositors  can- 
not but  have  a  desirable  effect  upon  all  the  banks. 
But  if  the  aflflicted  institution  is  in  bad  manage- 
ment and  is  a  drag  to  the  association,  the  clear- 
ing house  is  likely  to  let  it  go,  glad  to  be  rid  of  a 
weak  member. 

(4)  What  is  probably  the  most  important  spe- 
cial function  of  the  clearing  house  is  the  issue  of 
clearing-house  loan  certificates.  These  may  be 
defined  as  secured  loans  made  by  associate  mem- 
bers to  other  members,  by  means  of  which  they 
may  pay  their  clearing  balances.  Fifty  years  and 
more  ago.  New  York  bankers  devised  the  scheme 
of  issuing  clearing-house  loan  certificates,  and 
they  have  served  long  and  faithfully.  Since  1860 
no  less  than  nine  times  has  the  New  York  Clear- 
ing House  come  to  the  rescue  of  the  banking  in- 
terests of  New  York  City  with  the  loan  certifi- 
cate.^ During  these  nine  times  not  a  single  dollar 
has  been  lost  in  this  manner.  The  community  has 

'  There  have  been  approximately  $270,000,000  of  clearing-house 
loan  certificates  issued  in  New  York. 


174  PRACTICAL  BANKING 

come  to  look  to  these  certificates  as  a  source  of 
relief. 

Since  the  adoption  of  this  plan  in  New  York, 
many  clearing  houses  throughout  the  country 
have  taken  it  up.  By  means  of  these  certificates 
members  pay  their  balances  at  the  clearing  house, 
and  so  retain  cash  for  demands  at  the  bank. 

During  times  of  financial  disturbance,  the  New 
York  Clearing-House  Association  appoints  five 
bank  officers  from  its  members  who,  with  the 
president  of  the  association,  form  the  loan  com- 
mittee. It  is  the  particular  duty  of  this  committee 
to  meet  each  morning  and  consider  the  collateral 
offered  by  members  for  loan  certificates.  These 
certificates  have  been  issued  in  amounts  varying 
from  fifty  to  one  hundred  dollars  on  one  hun- 
dred dollars'  worth  of  collateral.  The  certificates 
have  ranged  in  denomination  from  one  hundred 
thousand  dollars  to  twenty-five  cents. 

In  1907  the  Association  realized  that  the  bank- 
ing interests  of  the  city  demanded  a  larger  com- 
mittee, and  accordingly  an  associate  loan  com- 
mittee of  five  was  authorized  and  appointed  to 
assist  the  general  loan  committee.  On  the  loan 
committee  of  the  New  York  Clearing  House  have 
served  some  of  the  country's  most  brilliant  and 
versatile  bankers. 

Now  the  issuance  of  loan  certificates  through 
the  clearing  house  is  purely  a  self-preservative 
measure.  Moreover,  it  is  intended  to  be  tem- 
porary. Thus,  it  is  customary  to  issue  the  certifi- 
cates payable  with  six  per  cent  interest  per  annum. 
The  interest  is  payable  by  the  bank  using  the 
certificate  and  is  receivable  by  the  member  which 


THE  CLEARING   HOUSE  175 

accepts  it  in  lieu  of  cash.  The  idea  is  to  fix  the 
rate  of  interest  high  so  that  it  will  be  undesir- 
able to  have  certificates  outstanding  after  the 
strain  is  over.  In  actual  practice  they  are  very 
promptly  retired.  When  a  bank  desires  to  take 
up  any  or  all  of  its  outstanding  certificates,  it 
notifies  the  loan  committee,  which  fixes  a  day  on 
which  interest  shall  cease  on  the  certificates  and 
serves  notice  to  that  effect  on  the  bank  or  banks 
holding  them.  In  due  time,  they  are  sent  through 
the  clearing  for  redemption. 

When  the  certificates  have  been  retired,  the 
banks  issuing  them  can  present  them  to  the  loan 
committee  and  obtain  the  collateral  securing 
them.  Thus,  the  loan  certificates,  while  not  used 
and  paid  out  of  the  bank  as  cash,  have  the  effect 
of  taking  its  place  among  clearing-house  members. 
Actual  money  is  left  for  the  necessary  demands 
on  the  bank. 

(5)  During  the  panic  of  1907-08,  many  clear- 
ing-house associations  throughout  the  country 
authorized  their  members  to  issue  certificates  in 
the  form  of  checks  payable  to  bearer,  drawn 
against  the  bank  putting  them  into  circulation. 
These  were  equivalent  to  cashiers'  checks,  and 
for  a  time  were  used  in  place  of  much  regular 
currency.  Most  were  guaranteed  by  bonds  and 
other  securities  deposited  with  the  clearing  house. 
Others  were  unsecured.  It  was  surprising  to  find 
how  they  circulated  throughout  the  country.  It 
was  nothing  unusual  to  have  certificates  presented 
for  payment  issued  by  banks  far  distant.  They 
were  accepted  on  the  same  basis  as  other  cashiers' 
checks,  and  were  handled  either  as  clearing  items 


176  PRACTICAL  BANKING 

—  if  they  were  on  local  banks  —  or  through  the 
transit  department,  if  they  were  on  out-of-town 
banks.  ^ 

In  conclusion,  it  may  be  of  interest  to  observe 
a  few  figures  on  the  transactions  of  clearing  houses 
throughout  the  country  and  their  relation  to 
population.  The  first  matter  which  will  appeal 
to  the  eye  is  that  the  population  per  bank  has 
dechned  almost  fifty  per  cent  between  1880  and 
1909;  this  will  emphasize  the  rapid  growth  of 
banking  since  that  time,  particularly  when  it  is 
remembered   that  the  population   in  the   same 

1  This  practice  was  originated  in  Atlanta,  Georgia,  in  1893.  As 
Mr.  Cannon  points  out,  it  was  perfected  in  the  same  year  in  Birm- 
ingham, Alabama.  The  writer,  who  was  a  resident  of  the  latter  city 
in  1907-08  and  paying  teller  in  one  of  the  city's  banks,  well  remem- 
bers how  it  worked  out.  Certificates  as  small  as  twenty-five  cents, 
payable  to  bearer,  were  issued  and  used,  not  only  to  pay  off  clearing 
debits,  but  to  honor  checks  over  the  counter.  At  one  time  the  clear- 
ing house  limited  its  members  to  the  payment  of  twenty-five  dollars 
in  cash  weekly  to  each  customer,  except,  as  I  remember,  in  the  case 
of  certain  pay-rolls.  The  issuance  and  circulation  of  these  notes  were 
successful  in  the  extreme.  The  writer,  however,  feels  that  much  was 
due  to  the  loyal  support  of  merchants  of  the  city,  many  of  whom 
offered  five  and  ten  per  cent  premium  on  this  "scrip"  used  in  pay- 
ment of  merchandise. 

The  question  is  raised,  no  doubt,  as  to  how  these  certificates 
escaped  the  federal  tax  of  ten  per  cent  on  all  currency  issued  other- 
wise than  as  authorized  by  the  national  banking  laws.  Certainly 
they  were  used  as  emergency  currency  and  served  every  local  need 
for  money.  Assuredly  the  practice  was  radical  in  so  far  as  it  not  only 
rendered  mutual  assistance  between  banks,  but  actually  increased 
the  available  cash  for  general  purposes  many  millions  of  dollars.  To 
tell  the  truth,  the  writer  suspects  that  the  Treasury  Department  was 
willing  to  make  a  rather  liberal  construction  of  the  usage  of  clearing- 
house certificates  as  circulating  notes  in  view  of  the  general  financial 
disturbance  of  the  whole  country.  The  notes  seemed  "safe"  inas- 
much as  from  thirty-three  and  one  third  to  one  hundred  per  cent 
collateral  additional  to  the  face  value  of  the  notes  were  required. 
Furthermore,  they  could  easily  be  regarded  as  cashiers'  checks 
secured  by  a  special  deposit  of  collateral  with  trustees. 


THE  CLEARING  HOUSE 


177 


period  has  increased  from  about  fifty  millions  to 
about  eighty-nine  millions.  During  the  same 
time  clearings  reported  from  twenty-four  cities 
with  $50,000,000,000  cleared  have  soared  to 
$165,000,000,000  from  one  hundred  and  twelve 
cities,  an  increase  of  two  hundred  and  ten  per 
cent,  while  the  population  has  increased  nearly 
ninety  per  cent.  It  will  be  interesting  to  know 
that  New  York  City  has  maintained  almost  the 
same  relation  to  the  total  clearing,  although  the 
number  of  cities  reporting  has  increased  about 
three  hundred  sixty-six  per  cent.  In  1880  New 
York's  clearings  were  seventy-six  per  cent  of  the 
total,  and  in  1909  they  were  sixty-two  per  cent 
of  the  total. 


1880 

1890 

1900 

1909 

Total  number  of  banks 

of  all  kinds 

6,532 

8,201 

10,378 

22,459 

Number  of  inhabit- 

ants to  each  bank.  . 

7,678 

7,635 

7,337 

3,934 

Number    of    cities    re- 

porting clearing 

Amount  cleared  in  the 

24 

56 

87 

112 

year 

$50,766,000 

$60,623,000 

$86,205,000 

$165,608,000  » 

^  Figures  compiled  from  the  volume,  Statistics  for  the  United 
States,  JS67-1909,  by  A.  Piatt  Andrew,  in  the  National  Monetary 
Commission  Series. 


CHAPTER  XVIII 

FOREIGN  EXCHANGE 


Foreign  exchange  is  that  branch  of  banking, 
created  by  and  built  up  through  the  commercial 
and  financial  intercourse  of  nations.  Every  year 
we  export  manufactured  articles,  produce,  and 
raw  material  from  this  country  in  scarcely  cal- 
culable amounts.  Every  year  we  import  measure- 
less quantities  of  every  product  of  nature's 
bounty  and  man's  ingenuity.  Our  citizens  scour 
the  face  of  the  earth  and  even  penetrate  its 
bowels  or  seek  the  space  above  the  earth  in  search 
of  art,  recreation,  and  learning.  All  these  things 
require  vast  outlays  of  credit.  The  consequence 
is  that  for  our  expenditures  we  owe  creditors 
across  the  water,  and  for  their  purchases  they 
owe  us.  The  foreign  exchange  is  the  medium  of 
settling  these  international  debts.  ^ 

A  bill  of  exchange  is  a  draft  against  a  credit 
abroad,  payable  on  demand  or  on  a  specified 
date.^ 

'     *  There  are,  to  be  sure,  bills  to  create  credit,  but  more  of  them 
anon. 

*  Note  the  lucidity  of  Mr.  Franklin  Escher's  description  of  the 
ultimate  basis  of  foreign  exchange:  "Not  all  international  obliga- 
tions are  settled  by  having  the  creditor  draw  direct  on  the  debtor. 
Sometimes,  gold  is  actually  sent  in  payment.  Sometimes,  the  debtor 
goes  to  a  bank  engaged  in  selling  drafts  on  the  city  where  the  obli- 
gation exists,  gets  such  a  draft  from  him.  and  sends  it.  But  in  a  vast 
majority  of  cases  payment  is  effected  as  stated  —  by  a  draft  drawn 


FOREIGN  EXCHANGE  179 

By  far  the  greater  part  of  our  exports  are  to 
Europe  and  the  greater  part  of  our  imports 
thence  or,  at  least,  through  bankers  there.  There- 
fore, for  the  purposes  of  this  article,  we  shall 
chiefly  content  ourselves  with  a  discussion  of 
America's  dealings  with  Europe. 

Now,  when  we  say  that  New  York  draws  many 
finance  bills,  or  that  Paris  bills  are  a  drug  on  the 
London  market,  it  must  not  be  imagined  that 
New  York,  Paris,  and  London  are  each  a  solidly 
organized  market  of  traders,  each  threatening 
the  other  and  trying  to  outwit  him.  Quite  the 
reverse  is  true.  These  markets  are  composed  of 
bankers  and  brokers  each  competing  sharply 
with  his  fellow  and  frequently  cutting  his  next 
neighbor,  though  he  thereby  accommodate  a 
foreign  correspondent.  So  let  us  not  think  of  New 
York  or  London  as  a  compact  combination  of 
bankers,  but  as  an  aggregation  of  individuals 
trying  to  outdo  each  other.  The  rate  of  dis- 
count on  bills  is  said  to  be  regulated  by  the 
supply  and  demand  of  foreign  bills  of  exchange, 
but  there  is  no  general  exchange  at  which  rep- 
resentatives of  bankers  meet  to  fix  the  price. 
Brokers  go  from  bank  to  bank  getting  the  prices 
both  on  selhng  bills  to  them  and  buying  bills  from 
them.  There  is,  however,  no  lack  of  coopera- 
tion between  correspondents  in  different  markets. 

directly  on  the  buyer  of  the  goods.  John  Smith  in  London  owes  me 
money.  I  draw  on  him  for  £lOO,  take  the  draft  around  to  my  bank, 
sell  it  at,  say,  4.8G,  getting  for  it  a  check  for  $i80.  I  have  my  money 
and  I  am  out  of  the  transaction.  .  .  .  The  buying  and  selling  and 
discounting  of  countless  such  bills  of  exchange  constitute  the  very 
foundation  of  the  foreign  exchange  business."  —  Foreign  Exchange, 
pp.  3,  4. 


180  PRACTICAL  BANKING 

If  Americans  have  a  large  amount  of  credit  in 
Europe,  bills  of  exchange  —  that  is,  drafts  against 
these  credits  —  are  comparatively  cheap;  whereas, 
if  our  credit  abroad  does  not  bear  a  generous 
ratio  with  the  demand  here  for  bills  against  Eu- 
rope, the  price  naturally  rises.  Tabulating,  we 
find  that  the  items  working  toward  an  accumula- 
tion of  credit  in  our  favor  abroad  are,  in  chief,  as 
follows :  — 

(1)  Exportation  of  cotton,  wheat  and  other 
commodities,  and  manufactured  goods. 

(2)  The  purchase  by  foreigners  of  American 
securities,  for  the  payment  of  which  bills 
are  drawn  by  American  brokers. 

(3)  The  payment  of  interest  or  dividends  on 
foreign  securities,  held  by  American  in- 
vestors. 

(4)  Loans,  made  to  Americans  abroad  for 
which  bills  are  drawn. 

(5)  Expenditures  of  foreign  tourists  in  the 
United  States  who  draw  for  funds  on  home 
concerns. 

On  the  other  hand,  those  items  operating 
against  America  and  tending  to  raise  the  price  of 
exchange  here  are :  — 

(1)  Immense  importation  to  the  United  States, 
for  which  Americans  must  remit  in  ex- 
change. 

(2)  The  liquidation  of  foreign  loans  to  America 
which  mature  abroad. 

(3)  The  enormous  sum  spent  by  American 
tourists  and  residents  in  Europe. 

(4)  The  purchase  by  Americans  of  securities 
in  European  markets. 


FOREIGN  EXCHANGE  181 

(5)  The  interest  and  dividends  payable  on 
American  securities  held  by  foreigners. 

Generally  speaking,  foreign  exchange  is  the 
means  by  which  individuals  or  firms  on  this  side 
pay  then*  foreign  creditors  and  collect  from  their 
foreign  debtors.  This  applies  in  a  similar  sense 
to  London,  Paris,  Berlin,  and  Amsterdam.  If, 
as  is  sometimes  the  case,  the  supply  of  foreign 
bills  of  exchange  is  too  low  for  the  demands,  or 
if  it  fails  altogether,  we  pay  our  foreign  debts  by 
exporting  gold.  If,  on  the  other  hand,  the  de- 
mand for  exchange  is  small  and  there  is  a  large 
amount  for  sale,  we  collect  our  credits  abroad  by 
importing  gold. 

It  is  obvious,  therefore,  that  the  highest  point 
to  which  the  price  for  foreign  bills  of  exchange 
can,  under  normal  conditions,  reach,  is  the  gold 
export  price  —  that  is,  the  point  at  which  it  is  as 
cheap  to  ship  gold  to  pay  one's  obligations  as  it 
is  to  buy  bills.  This  is  true,  for  a  further  advance 
would  simply  mean  that  gold  would  be  shipped 
to  pay  debts.  On  the  other  hand,  the  limit  to 
which  the  market  can,  under  normal  conditions, 
decline  is  naturally  the  cost  of  importing  gold. 
For,  with  little  demand  and  a  large  accumulation 
of  exchange  credits  abroad,  the  prices  fall,  but 
when  they  reach  the  point  where  the  loss  on  sell- 
ing exchange  is  just  the  cost  of  importation  of 
gold,  why,  of  course,  the  fall  is  arrested,  for  a 
lower  decline  would  simply  mean  the  importa- 
tion of  gold.  Sometimes,  however,  gold  is  im- 
ported when  the  price  is  above  the  import  point; 
ordinarily,  this  is  done  when,  as  in  time  of  strin- 
gency, there  is  a  more  profitable  field  here  for 


182  PRACTICAL  BANKING 

gold  than  for  exchange.  This  was  done  in  1907, 
when  there  was  a  considerable  premium  on  cur- 
rency. 

In  his  paper  on  "Foreign  Exchange,^  Mr. 
Albert  Strauss  thus  lucidly  describes  the  exporta- 
tion and  importation  of  gold :  — 

The  pure  gold  contained  in  one  English  sovereign 
is  equivalent  exactly  to  $4.8665  of  our  gold  coins;  so 
that,  apart  from  charges  and  expenses,  $4.8665  of  our 
gold  will,  when  sent  abroad,  produce  a  credit  of  one 
pound  sterling;  to  this  cost  must  be  added  freight,  in- 
surance, and  other  expenses,  amounting  to  about  one 
fourth  of  one  per  cent.  This  brings  the  cost  of  one 
pound  through  shipment  to  about  $4.88,  which  is, 
roughly,  the  gold-export  point  for  full-weight  coin.  .  .  . 
The  British  sovereign,  if  full  weight,  will  when  sent 
here  and  melted  down  yield  gold  for  which  the  United 
States  Assay  Office  will  pay  $4.8665;  the  expense  of 
sending  the  sovereign,  freight,  insurance,  cartage,  and 
kegs  will  amount  to  about  one  quarter  of  one  per  cent, 
so  that  the  net  yield  of  the  full-weight  sovereign  in 
dollars  will  be  $4.85f .  But  between  the  day  on  which 
the  banker  buys  the  bill  of  exchange  in  New  York  and 
the  day  on  which  he  receives  in  New  York  the  gold 
which  the  bill  entitled  him  to  collect  in  London,  there 
must  elapse  the  time  necessary  to  send  the  bill  to 
London,  plus  the  time  needed  to  send  the  gold  back, 
—  roughly,  fifteen  days,  —  during  which  time  the 
banker  loses  the  use  of  the  money.  This  loss  of  interest 
must  be  deducted  from  the  net  yield  of  the  imported 
sovereign,  and  thus,  if  money  is  worth  six  per  cent  per 
annum,  the  net  yield  of  full-weight  sovereigns  is 
brought  down  to  about  $4.84j,  which  is  the  gold-im- 
port point  for  demand  exchange  when  money  is  worth 

*  Columbia  University  Lectures,  Currency  Problem,  1908. 


FOREIGN  EXCHANGE  183 

six  per  cent  per  annum.  Losses  by  abrasion  will  bring 
down  this  point  by  perhaps  one  tenth  per  cent,  to 
about  $4.83f.  When  money  is  higher  the  import 
point  will  be  lower,  and  vice  versa.  There  is,  therefore, 
a  margin  of  profit  in  buying  demand  bills  and  im- 
porting gold  sovereigns  against  the  purchase  whenever 
the  rate  for  demand  bills  falls  below  the  gold-import 
point. 

But  extraordinary  decline  in  the  quotation  of 
foreign  bills  is  speedily  stopped,  for  there  is  a  rush 
by  bankers  to  buy  bills  in  order  to  import  gold, 
and  this  quickly  restores  the  rate  to  normal. 

Since  London  is  similarly  situated  regarding 
the  exportation  and  importation  of  gold,  there  is 
always  an  accumulation  of  foreign  gold  coins  in 
the  vaults  of  the  Bank  of  England,  of  which  no 
inconsiderable  part  consists  of  United  States  coin. 
As  Mr.  Strauss  further  points  out,  these  are  to 
be  obtained,  usually,  at  a  somewhat  better  price 
than  sovereigns,  for  it  saves  the  cost  of  coining 
just  so  many  pieces.  Sometimes  one  can  also  get 
bullion  at  a  favorable  rate.^  The  buyer  has  some 
advantage  in  taking  used  United  States  coin,  for 
he  buys  them  in  England  by  weight  and  sells 
them  in  this  country  at  their  face  value,  unless 
they  be  under  weight.  Thus  he  gains  the  ad- 
vantage of  the  abrasion.  It  is  curious  to  see  the 
way  gold  is  shipped  from  London  to  America. 
The  British,  for  instance,  put  them  up  in  bags 
whose  contents  weigh  five  hundred  ounces.  The 
bags  will  frequently  contain  foreign  gold  coin  of 
various  kinds,  and  if  the  coin  do  not  weigh  up 

'  But  any  one  holding  Bank  of  England  notes  will  get  sovereigns 
unless  he  makes  special  arrangements. 


184  PRACTICAL  BANKING 

exactly,  they  throw  in  some  chopped-off  frag- 
ments of  coins  until  the  exact  weight  is  reached. 

When  an  American  banker  or  broker  exports 
gold,  he  is  liable  to  lose  about  one  tenth  per  cent 
by  abrasion  if  he  uses  ordinary  United  States 
coins,  since  he  can  receive  value  in  England  only 
by  their  weight.  But  by  the  payment  of  a  much 
smaller  fee  than  the  loss  by  abrasion  would  come 
to,  he  is  usually  enabled  to  get  gold  bars  from  the 
United  States  Assay  Office,  buying  them  by 
weight.  He  naturally  prefers  this  method;  the 
office  is  willing,  since  the  reduction  of  the  coun- 
try's circulation  would  necessitate  the  coining 
of  more  gold  at  an  added  expense. 

In  many  respects  European  money  markets 
are  superior  to  ours.  For  instance,  England  is 
what  is  called  an  open  discount  market.  English 
banks  buy  bankers'  or  first-class  merchants'  ac- 
ceptances and  hold  them  till  maturity  or,  if  cash 
be  desired,  rediscount  them  in  the  open  market. 
There  are  many  houses  in  London  which  make 
a  specialty  of  these  rediscounts.  Rediscounting 
has  rarely  been  done  in  America  even  in  case  of 
first-class  commercial  paper.  But  with  the  ad- 
vent of  the  federal  reserve  system,  an  almost 
completely  open  discount  market  will  be  erected.^ 

Another  form  of  income-earning  transaction 
quite  unknown  to  American  banking  is  the  ac- 
cepting of  long  drafts,  for  which  a  commission  is 
charged.  This  is  common  in  Europe.  The  com- 
mission is,  of  course,  based  on  the  security  of  the 
draft,  both  as  regards  documents  attached  and  the 
responsibility  of  the  client  for  whom  it  is  done. 

^  See  chapter  xx  for  the  provisions  of  the  new  system. 


FOREIGN  EXCHANGE  185 

In  Germany,  the  Reichsbank  has  established 
a  system  called  the  "Giro  Conto,"  by  which 
money  is  forwarded  free  of  exchange  for  cus- 
tomers to  any  places  where  the  Reichsbank  has 
a  branch.  Since  the  Reichsbank  has  branches  in 
every  important  city  in  Germany,  it  is  of  great 
value  to  merchants,  most  of  whom  carry  ac- 
counts with  the  Reichsbank,  although  no  interest 
is  allowed  on  balances. 

Two  other  conveniences  of  European  banking 
are  "Del  Credere"  and  "Bank  Post  Remit- 
tances." By  "Del  Credere"  is  meant  the  cus- 
tom which  European  bankers  have  of  insuring  the 
pajTiient  of  time  bills  at  maturity.  Rates  for 
doing  this  vary  from  one  fortieth  per  cent  to  one 
and  one  half  per  cent,  according  to  the  responsibil- 
ity of  the  drawee  or  according  to  the  time  for 
which  the  bills  live.^  We  have  nothing  equivalent 
to  it  in  this  country. 

A  bank  in  the  United  States  may  accept  a  cer- 
tain amount  of  money  from  a  person  to  be  re- 
mitted to  some  one  at  his  particular  address  in 
Europe.  This  brings  us  to  the  "Post  Remit- 
tances" of  the  Continent.  The  American  bank 
simply  sends  to  its  foreign  correspondent  in  the 
country  concerned  the  name  of  the  person  to 
whom  the  money  is  to  be  remitted,  with  his  exact 
address.  Upon  this  authorization  the  European 
banks  turns  over  the  money  to  the  Government, 
which  delivers  it  to  the  remittee  through  the  mail 
service,  exacting  a  small  fee  for  guaranteeing  de- 
livery. This  transaction  is  called  the  "Bank  Post 
Remittance." 

^  See  Anthony  W.  Margraff,  International  Exchange,  p.  190. 


186  PRACTICAL  BANKING 


II 

The  foreign  department  of  a  bank  is  in  reality 
a  complete  bank  in  itself,  having  its  own  tellers, 
bookkeepers,  and  officers.  Not  only  in  New  York, 
the  great  financial  center  of  the  nation  control- 
ling the  foreign  transactions  in  this  country,  are 
there  banks  having  foreign  departments,  but  far 
and  wide  over  the  United  States  large  banks  have 
established  and  are  establishing  foreign  depart- 
ments with  direct  relations  with  the  Old  World. 

Why,  then,  do  banks  have  foreign  depart- 
ments? The  reasons  have  been  well  tabulated 
by  one  writer  ^  and  in  terse  form  they  are :  — 

(1)  The  foreign  department  opens  means  for 
the  general  clientele  of  the  bank  to  transact 
all  their  business  in  the  bank.  This  avoids 
the  possibility  of  losing  good  accounts  be- 
cause of  the  superior  facilities  offered  by  a 
rival  bank. 

(2)  It  serves  as  a  good  advertisement  for  the 
bank. 

(3)  It  affords  the  bank  oppK)rtunities  for  plac- 
ing loans  at  good  rates  in  Europe's  money 
market  by  purchases  of  foreign  bills  of  ex- 
change for  investment,  by  the  purchase  of 
finance  bills  or  bankers'  long  bills,  as  they 
are  called. 

(4)  It  places  a  bank  in  position  to  subscribe 
to  Euroi>ean  national  loans,  since  foreign 
correspondents  usually  invite  their  Ameri- 
can friends  to  help  underwrite  these  loans. 

The  foreign  exchange  transactions  are  actually 

*  Anthony  W.  Margraff,  International  Exchange. 


FOREIGN   EXCHANGE  187 

carried  on  by  the  drawing  and  accepting,  the  buy- 
ing and  selling  of  bills  of  exchange.  Bills  of  ex- 
change are  simple  drafts  against  credits  abroad, 
or  for  the  creation  of  credits  abroad.  The  most 
common  of  the  forms  are  the  cable  transfer,  the 
demand  bill,  and  the  long  bill.  These  bills  are 
commonly  payable  in  the  currency  of  the  coun- 
try on  which  they  are  drawn.  All  bills  are  drawn 
in  duplicate  and  distinctly  marked  ''original" 
and  "duplicate,"  or  "first"  and  "second,"  of  ex- 
change. 

Ill 

As  we  begin  the  discussion  of  bills  of  exchange, 
let  us  bear  in  mind  that  the  exchange  market 
does  not  consist  alone  in  liquidating  debts  con- 
tracted or  in  collecting  credits  accumulated 
abroad  in  the  ordinary  conduct  of  business.  These 
commercial  transactions,  however,  are  the  ulti- 
mate cause  of  the  market. 

With  keen  eyes  scanning  the  financial  horizon, 
exchange  bankers  speculate,  buying  bills  on  a 
city  with  a  large  supply  and  little  demand  here, 
and  authorizing  their  agents  in  other  foreign 
cities,  where  there  is  little  supply  but  great  de- 
mand for  this  particular  exchange,  to  draw 
against  their  credit. 

Competition  is  sharp  among  the  astute,  open- 
eyed  bankers  who  deal  in  foreign  exchange.  This, 
of  course,  tends  to  reduce  the  percentage  of  profit 
on  exchange  transactions.  It  is  not  uncommon  to 
hear  of  bankers  making  a  purchase  on  which  a 
profit  of  only  1-128  per  cent  can  be  made.  The 
exchange  rates  fluctuate  constantly.  Bankers  buy 


188  PRACTICAL  BANKING 

at  what  they  consider  a  good  price,  and  sell  their 
own  checks  against  the  credit,  established  by  re- 
mitting the  purchased  bill,  hoping  to  obtain  a 
slightly  better  price  than  they  paid. 

Since  bills  are  drawn  against  credits  abroad, 
let  us  see  who,  in  the  ordinary  course  of  events, 
have  them  for  sale.  First,  must  be  mentioned  the 
cotton  planter  of  the  South  and  the  wheat-raiser 
of  the  West.  We  undoubtedly  export  more  cot- 
ton and  wheat  than  anything  else.  We  also  export 
all  sorts  of  manufactured  articles  and  raw  goods. 
So  the  exporter  draws  a  bill  against  his  purchaser 
across  the  sea  and  offers  it  for  sale.  Then  finance 
bills  create  credits  abroad,  against  which  bills 
may  be  drawn;  these  will  be  discussed  a  little 
later.  Next,  brokers  who  buy  American  securi- 
ties for  foreigners  make  drafts  on  their  clients 
for  the  cost  of  the  securities  together  with  their 
commissions.  In  this  case  the  securities  are  in- 
variably attached  to  the  bill.  This  class  of  bill 
is  commonly  offered  for  sale. 

The  demands  come  from  importers  of  foreign 
commodities  and  manufactured  goods;  from  cor- 
porations remitting  interest  on  American  securi- 
ties held  abroad;  from  bankers  who  sell  cable 
transfers  and  other  forms  of  exchange;  and  from 
American  tourists. 

As  has  been  already  said,  the  exchange  banker 
scans  the  world's  market  closely  and  seeks  to 
find  where  the  prices  are  cheap  and  where  the 
demand  is  great.  By  cablegram  he  is  kept  in- 
formed at  all  hours  of  the  day  regarding  the 
foreign  market's  want  and  supplies.  Now,  if  he 
finds  in  New  York  a  large  demand  for  Amsterdam 


FOREIGN   EXCHANGE  189 

bills  with  but  little  supply  in  sight  and  a  large 
supply  of  Berlin  bills  with  little  demand,  he  will 
buy  Berlin  bills,  send  them  to  Amsterdam  for 
credit,  and  draw  his  bills  against  Amsterdam.^ 
Theoretically,  this  should  work  out  beautifully 
with  considerable  profit,  but  the  market  is  com- 
posed of  a  vast  crowd  of  eager  bankers  and  brok- 
ers, and  the  price  for  Berlin  is  not  likely  to  fall 
to  the  import  point,  nor  does  the  Amsterdam  price 
soar  up  to  the  point  of  exportation.  The  very  buy- 
ing and  selling  prevents  either  alternative. 

IV 

Gold  always  takes  the  shortest  path  to  its  final 
destination  when  it  is  sent  in  settlement  of  dif- 
ferences. Of  course,  this  is  no  peculiar  virtue  of 
the  metal,  but  is  caused  by  the  exchange  bankers, 
who  cut  every  corner  and  take  advantage  of 
every  infinitesimal  profit.  This,  however,  needs 
a  concrete  illustration. 

Suppose  that  some  year  we  export  a  huge  crop 
of  cotton  to  England,  but  do  not  buy  in  return. 
On  the  other  hand,  suppose  we  buy  wines  and 
manufactured  goods  from  France,  but  do  not  sell 
them  much.  A  lumbering  process  of  settlement 
would  be  to  import  gold  from  London  and  then 
export  it  back  to  Paris.  As  a  matter  of  fact,  the 
gold  is  shipped  directly  to  Paris  from  London. 
This  is  an  example  on  a  large  scale  of  what  is  ac- 
tually happening  in  a  smaller  way  perhaps  many 
times  a  year.  It  need  not  be  a  great  crop  of  cotton 
which  we  export  or  wines  which  we  import;  the 
phenomenon,  indeed,  may  not  be  caused  by  ex- 

^  This  transaction  is  known  as  "arbitraging  in  exchange." 


190  PRACTICAL  BANKING 

ports  or  imports  at  all,  but  by  the  accumulation 
of  debt  in  one  city,  caused  by  finance  bills  matur- 
ing, and  the  credit  in  another,  due  to  the  proceeds 
of  some  discounted  paper. 

From  this  we  arrive  at  a  curious  but  economi- 
cal scheme,  arising  not  from  international  charity 
but  from  international  desire  to  secure  every  jot 
and  tittle  of  profit.  Mr.  Strauss  speaks  of  "  the 
exchange  market  as  an  economical  mechanism, 
automatically  making  delicate  international  ad- 
justments." 

London  is  a  free  gold  market,  and,  to  judge 
from  the  past,  is  the  only  reliable  one.  Berlin  is 
nominally  a  free  gold  market,  although  it  some- 
times has  difficulty  in  paying  in  gold.  Paris  is  not 
a  gold  market,  although  it  usually  remits  in  gold. 
However,  it  reserves  the  right  to  charge  a  prem- 
ium for  gold.  New  York  is  also  nominally  a  free 
gold  market  and  was  considered  reliable  until  the 
panic  of  1907  when  it  proved  that  the  reverse 
was  true. 

London  owes  much  of  her  prominence  in 
finance  to  her  free  gold  market,  and  New  York 
cannot  hope  to  exert  a  controlling  influence  upon 
the  world  of  finance  until  it  becomes  a  free  gold 
market,  absolutely  and  reliably. 

V 

Demand  bills  are  those  payable  at  presenta- 
tion. There  is  nothing  complicated  about  them, 
so  we  turn  to  a  discussion  of  long  bills,  which  offer 
opportunity  for  careful  study. 

A  long  bill  is  "  international  credit."  If  this 
credit  fails,  as  in  panics,  resort  must  be  had  to 


FOREIGN  EXCHANGE  191 

the  unwieldy  method  of  paying  and  collecting  by 
the  shipment  of  gold.  We  have  all  read  of  the 
slow,  irksome  process  of  separating  the  cotton 
fiber  from  the  seed  in  the  days  before  the  inven- 
tion of  the  gin.  It  is  said  that  an  expert  planta- 
tion hand  could  separate  no  more  than  a  few 
pounds  in  a  day.  The  modern  gin  seizes  upon  the 
cotton  as  it  is  brought  from  the  field  and  in  a  short 
time  separates  many  hundred  pounds  of  seed  and 
fiber.  The  movement  of  gold  to  pay  and  collect 
balances  is  as  awkward  as  the  old  hand-method 
of  separating  cotton. 

In  general,  there  are  two  kinds  of  long  bills, 
namely:  Bankers'  long  bills  or  finance  bills,  and 
commercial  long  bills. 

Bankers'  long  bills,  or  finance  bills  as  they  are 
frequently  called,  are  simply  drafts  from  an 
American  bank  on  a  foreign  correspondent,  pay- 
able usually  at  sixty  or  ninety  days'  sight.  Most 
of  this  class  of  bills  are  drawn  on  England,  and  are 
accompanied  in  many  cases  by  stocks  or  bonds 
listed  on  the  New  York  Stock  Exchange.  Such 
collateral  or  any  at  all,  however,  is  a  matter  of 
negotiation  and  it  usually  happens  that,  if  the 
drawer  is  a  house  of  excellent  and  world-wide 
reputation,  no  collateral  whatever  is  required. 
This  class  of  international  loan  provides  an  excel- 
lent means  of  leveling  world  money  rates.  Bankers 
make  use  of  them  to  take  advantage  of  the  dif- 
ference in  interest  rates  between  that  in  their 
city  and  that  in  some  foreign  city. 

Suppose  that  on  a  certain  day,  the  interest 
rate  in  New  York  is  five  per  cent,  while  that  in 
London  is  only  three  per  cent.   After  paying  the 


192  PRACTICAL  BANKING 

necessary  expenses  on  a  finance  bill,  such  as  a 
bill  stamp  and  commission  to  the  London  house 
for  accepting  the  bill,  the  New  York  banker  has 
an  opportunity  to  make  his  money  in  two  ways, 
as  follows:  First,  by  the  investment  of  the  pro- 
ceeds at  a  higher  rate  than  he  paid,  which  we 
assume  in  this  case;  second,  by  buying  a  demand 
bill  on  London  at  the  maturity  of  his  paper  at  a 
lower  rate  than  he  sold  his  long  bill  for.  These 
may  conversely  prove  sources  of  loss. 

Say,  the  New  York  banker  draws  a  ninety-day 
bill  on  his  London  correspondent  for  $100,000. 
Let  us  figure  how  much  he  would  probably  make 
on  it  under  ideal  conditions.  London  bankers 
charge  varying  commissions  for  accepting  these 
bills.  In  this  case,  say,  the  commission  is  one 
eighth  per  cent  for  ninety  days.  The  English 
bill  stamp  is  one  twentieth  per  cent,  and  the 
annual  discount  rate,  as  we  have  assumed,  is 
three  per  cent.  Resolving  all  these  to  rates  per 
annum,  we  have  — 

Commission 5  per  cent 

English  bill  stamp ^ 

English  discount  rate  on  bill 3 

3^ 

—  which  is  the  cost  of  the  bill. 

Now,  if  the  proceeds  can  be  invested  at  five 
per  cent,  there  is  a  net  profit  of  one  and  three 
tenths  per  cent  per  annum  on  the  transaction. 
This,  of  course,  neglects  the  loss  of  interest  on 
the  discount,  which  is  not,  however,  consider- 
able. On  $100,000  for  ninety  days,  this  net  profit 
would  be  roughly  $325.  This  assumes  that  he 
bought  a  demand  bill  to  pay  his  maturing  bill  at 


FOREIGN  EXCHANGE  193 

the  same  rate  at  which  he  sold  his  finance  bill. 
If  he  buys  a  bill  to  pay  his  obligation  at  a  lower 
rate,  he  makes  more  profit;  if  he  has  to  pay  a 
higher  price  for  his  demand  bill,  he  makes  less, 
or  even  loses.  Sometimes  bankers  guard  against 
the  possibility  of  loss  in  this  fashion  by  arranging 
in  advance  for  the  delivery  of  demand  bills  to 
them  just  before  their  long  bills  mature  abroad. 

The  exchange  banker  is  frequently  content  to 
make  a  little  outside  of  the  profit  on  exchange 
when  he  can  sell  his  bill  at  a  very  high  price.  He 
has  little  doubt  that  he  can  buy  to  meet  his  obli- 
gation at  a  much  lower  rate,  since  there  is  a  limit, 
at  least  theoretically  speaking,  to  its  rise,  and 
since  it  is  likely  to  fall  because  of  the  resultant 
eagerness  to  supply  the  demand.  It  is  a  curious 
fact  that  when  the  market  is  short  and  there  are 
few  bills  in  sight,  the  rising  price  brings  out  an 
ever-increasing  supply.  Mr.  George  Clare,  in  his 
book  on  Foreign  Exchange,  describes  this  rather 
felicitously:  "But  the  bidding  need  only  be  roused 
a  centime  or  two  to  tap  an  almost  inexhaustible 
source  of  supply  —  that  of  bankers'  drafts.  In 
other  words,  if  the  remitter  cannot  obtain  a  ready- 
made  bill,  he  must  only  pay  a  little  more  and  have 
one  made  to  order." 

Finance  bills  present  attractive  lines  of  invest- 
ments to  foreigners.  They  are  advantageous  in 
that  they  keep  gold  within  the  country. 

Mr.  Albert  Strauss  tells  of  an  amusing  occur- 
rence in  regard  to  the  issuing  of  finance  bills  in 
1907.  It  seems  that  during  the  summer  English 
houses  grew  quite  distrustful  of  American  bankers' 
bills   (finance  bills),   and  discriminated   against 


194  PRACTICAL  BANKING 

them,  buying  only  a  very  few.  In  the  fall  we  ex- 
ported an  immense  crop  of  wheat  to  supply  Eu- 
rope whose  crop  had  failed.  As  there  were  com- 
paratively few  outstanding  finance  bills  to  be 
paid,  the  inevitable  happened.  American  bankers 
imported  great  quantities  of  gold,  which  did 
a  good  turn  in  helping  to  alleviate  the  stringency 
here.  At  the  same  time  Americans  had  additional 
credit  because  of  the  heavy  purchase  by  Eu- 
ropeans of  our  securities  at  the  low  panic  prices. 
The  London  bankers  had  destroyed  one  of  the 
financial  adjusters  by  their  action  and  were  un- 
protected against  huge  demands  for  gold. 

This  system  of  selling  finance  bills  and  buying 
demand  bills  to  meet  them  at  maturity  is  the 
frequent  cause  of  a  peculiar  situation.  Say,  a 
bank  has  a  long  bill  maturing  in  London.  It 
often  happens  that  this  bank  buys  the  long  bill 
of  another  bank,  for  which  it  charges  a  rate 
slightly  above  the  regular  discount,  since  there 
is  a  certain  element  of  risk.  Sending  this  pur- 
chased bill  to  London  and  discounting  it  there, 
a  credit  is  formed  against  which  it  may  draw  de- 
mand bills  to  pay  its  obligation.  At  the  same 
time  it  may  be  selling  its  own  long  bills  to  another 
bank  in  order  to  invest  the  proceeds  profitably. 

Thus,  with  Mr.  Strauss,  we  may  conclude  that 
if  the  exchange  and  interest  rates  of  a  market  are 
high,  we  have  ample  reason  for  increasing  the 
number  of  long  bills.  But  if  the  interest  rate  is 
about  equal  in  the  two  markets,  exchange  is  the 
item  whence  profit  is  to  flow.  If,  again,  the  exchange 
rates  are  about  equal,  interest  is  to  be  considered. 

A  cable  transfer  is  nothing  more  than  a  tele- 


FOREIGN  EXCHANGE  195 

graphic  order  to  a  foreign  correspondent  to  pay 
a  certain  sum  on  receipt  of  the  cable  instead  of  on 
receipt  of  a  bill  of  exchange  by  steamer.  The  rate 
for  cable  transfers  is  somewhat  higher  than  for 
ordinary  demand  bills,  because  the  seller  loses 
interest  on  the  sum  transferred  by  cable  for  the 
number  of  days  required  to  send  a  demand  bill 
across.  In  abnormal  times  the  rates  for  cable 
transfers  soar.  As  a  rule  those  selling  cable  trans- 
fers carry  substantial  credit  balances  abroad,  re- 
plenished by  forwarding  demand  bills  to  the  credit 
of  their  accounts.  There  is  little  risk  in  this  kind 
of  business;  but  the  percentage  of  profit  is  small. 
The  average  profit  on  this  transaction  on  the  New 
York  market  is  fifteen  one  hundredths  of  a  cent 
per  pound  sterling.  ^  Occasionally  bankers  will  be 
able  to  sell  a  cable  at  a  price  which  warrants  the 
replenishing  of  their  account  by  buying  a  cable 
of  some  one  else.  Often  enough,  too,  a  cable  is  sold 
against  balances  which  have  accumulated  from 
deposits  of  all  kinds  of  bills,  such  as  are  herein 
described. 

VI 

Commercial  long  bills  are  those  which  are 
drawn  by  persons,  firms,  or  corporations  in  this 
country  against  credits  abroad.  Like  finance  bills, 
they  are  in  most  cases  drawn  for  sixty  or  ninety 
days.  They  are  accompanied  almost  invariably 
by  documents  such  as  bills  of  lading,  shippers' 
invoice,  and  marine  insurance  policy. 

The  financier  is  always  alert  to  employ  his 
capital  in  some  profitable  yet  safe  investment. 

1  Franklin  Eschcr,  supra,  p.  73. 


196  PRACTICAL  BANKING 

In  frequent  instances  commercial  long  bills  are 
admirably  fitted  to  fulfill  these  conditions. 

Suppose  money  went  begging  in  New  York  at 
three  and  one  half  per  cent,  while  in  France  five 
per  cent  could  be  obtained.  Assume  that  the 
banker  bought  a  ninety-day  bill  on  some  first- 
class  merchant  in  France.  This  bill  would  in  all 
probability  have  documents  attached.  On  the 
day  of  purchase  the  banker  sends  the  first  of  ex- 
change to  his  French  correspondent  for  accept- 
ance. He  also  sends  the  documents  with  orders 
to  surrender  the  same  on  acceptance  of  the  first 
of  exchange.  The  banker  notes  on  the  remaining 
second  that  the  first  is  accepted  and  held  by  such 
and  such  a  correspondent.^ 

He  now  files  away  the  second  until  a  short  time 
before  its  maturity  when  he  takes  it  out,  indorses 

*  Two  points  must  here  be  noted:  First,  that  documentary  com- 
mercial long  bills  are  of  two  kinds,  "acceptance"  and  "payment" 
bills.  "Acceptance"  bills  are  handled  as  described  above,  while 
"payment"  bills  provide  that  the  documents  shall  not  be  surrend- 
ered until  payment  is  made.  Bills  drawn  on  banks  are  always  "ac- 
ceptance" bills.  Of  coiu-se,  an  "acceptance"  bill  may  be  discounted 
and  converted  into  cash  as  soon  as  accepted,  and  so,  as  a  rule,  bring 
higher  prices  than  a  "payment"  bill,  which  may  be  allowed  to  run 
to  maturity  without  any  cash  being  paid  on  it.  But  "payment" 
bills  drawn  against  shipments  of  perishable  goods  must  be  paid  by 
the  drawees  before  maturity  to  prevent  the  merchandise  spoiling. 
This  payment  is  subject  to  a  rebate,  which  is,  however,  lower  than 
the  discount  rate  for  the  time  of  the  bill,  and  consequently  is  an  ad- 
vantage to  the  owner  of  the  bill.  An  example  of  a  "payment"  bill 
of  this  kind  is  one  drawn  against  the  shipment  of  grain.  A  cotton 
bill,  on  the  other  hand,  is  usually  an  "acceptance"  bill.  See  pages 
198  and  203.  "Payment"  long  bills  can  be  discounted  in  the  French 
market. 

The  second  point  to  remember  is  that  some  commercial  long  bills 
are  known  as  "clean"  bills;  that  is,  free  from  documents.  Such  bills 
arise  from  transactions  in  which  the  goods  are  delivered  before  the 
draft  is  made. 


FOREIGN  EXCHANGE  197 

it,  and  sends  it  to  some  foreign  agent  to  collect 
and  credit  the  proceeds.  With  the  indorsed  sec- 
ond the  agent  can  procure  the  accepted  first  and 
present  both  for  payment  at  maturity. 

If  the  same  rate  of  exchange  prevails  when  the 
proceeds  are  credited  which  prevailed  when  the 
banker  bought  the  bill,  he  makes  the  interest  on 
the  investment.  If  the  exchange  rate  is  higher, 
he  makes  more,  and  if  it  is  lower,  his  profit  is  re- 
duced. Since,  however,  these  bills  are  usually 
bought  when  exchange  rates  are  down,  there  is 
not  much  chance  for  loss  on  that  score. 

These  bills  are  very  attractive  in  that,  although 
they  are  to  run  for  a  certain  time,  they  may  imme- 
diately be  turned  into  a  credit  by  discount  abroad. 

The  three  most  desirable  kinds  of  bills  to  pur- 
chase are :  — 

(1)  Bankers'  drafts  on  foreign  agents  for  cred- 
its there.  These,  of  course,  are  accepted 
on  the  same  basis  as  any  other  piece  of  ex- 
change drawn  by  the  bank. 

(2)  Bills  of  merchants  accompanied  by  docu- 
ments covering  a  shipment  of  goods.  This 
shipment  should  consist  of  goods  that 
could  be  easily  resold  in  case  of  necessity. 

(3)  Bankers'  long  (sixty  or  ninety  days')  bills  on 
their  foreign  correspondents.  The  finan- 
cial status  of  the  drawers  of  these  bills 
should  regulate  chiefly  the  amount  of  them 
bought,  although  in  many  cases,  accom- 
panying security,  such  as  first-class  stocks 
and  bonds,  is  to  be  taken  into  consideration. 

In  the  case  of  acceptance  long  bills,  accom- 
panied by  documents,  the  attached  papers  are 


198  PRACTICAL  BANKING 

to  be  surrendered,  as  before  remarked,  at  the  ac- 
ceptance of  the  bill.  These  documents  consist  of 
bill  of  lading,  exporter's  certificate,  marine  in- 
surance policy,  and  at  times  consular  invoice. 
Across  the  sides  of  these  bills  frequently  is  written 
the  name  and  address  of  an  agent  to  be  notified  in 
case  of  the  refusal  of  the  drawees  to  accept  or  pay 
the  bill.  By  referring  it  to  an  agent,  the  drawer  is 
saved  the  expense  of  protest  fees,  cable  charges,  etc. 

VII 

It  is  now  in  order  to  treat  of  a  special  form  of 
merchants'  long  bill,  that  accompanied  and 
guaranteed  by  a  commercial  letter  of  credit. 

A  commercial  letter  of  credit  is  a  letter  ad- 
dressed by  a  bank  in  behalf  of  a  customer  to  a 
foreign  merchant,  authorizing  him  to  draw  on  the 
issuing  bank's  correspondent  in  a  certain  place 
for  a  specified  amount  to  be  the  cost  price  of  goods 
ordered  by  the  bank's  customer.  The  letter 
further  specifies  that  all  drafts  shall  be  accom- 
panied by  the  proper  documents. 

Commercial  letters  of  credit  are  the  source  of  a 
good  deal  of  benefit  both  to  the  importer  and  the 
exporter. 

(1)  They  insure  for  the  importer  prompt  ser- 
vice; they  enable  the  exporter  actually  to 
manufacture  goods  to  order. 

(2)  They  permit  the  importer  to  deal  on  a  cash 
basis,  while  payment  is  actually  deferred 
sixty  or  ninety  days;  they  permit  the  ex- 
porter to  sell  his  goods  practically  for  cash. 

These  letters  are  issued  in  four  parts;  one  sent 
to  the  foreign  agent  on  whom  the  exporter's  drafts 


FOREIGN  EXCHANGE  199 

will  be  made,  one  to  the  exporter,  and  one  to  the 
importer.  The  remaining  part  is  kept  by  the  issu- 
ing bank. 

Now,  if  we  suppose  that  a  New  York  merchant 
has  purchased  a  cargo  of  coffee  in  Java,  the  ex- 
porter may  call  upon  him  to  pay  before  the  goods 
arrive.  The  importer  may  not  wish  to  pay  cash 
for  these  goods  before  their  arrival;  in  fact,  may 
not  be  able  to  do  so.  It  would  seem  natural  that 
the  exporter  should  simply  draw  against  the  im- 
porter, and  this  is  sometimes  done.  But  usually 
the  bill  is  drawn  on  England,  for  reasons  that  we 
shall  presently  tabulate. 

We  shall  assume  that  the  bill  for  the  cargo  in 
question  was  drawn  on  England,  with  documents 
attached,  and  in  accordance  with  certain  require- 
ments which  are  to  be  brought  out  later.  Now, 
why  was  the  bill  drawn  on  England.'* 

(1)  The  pound  sterling  has  been  long  and  still 
is  the  international  standard.  Also,  the  most 
reliable  bank  in  Batavia  —  where  the  bill  is  prob- 
ably sold  —  is  possibly  a  British  bank.  Even 
though  it  is  not  a  British  bank,  it  is  in  closer 
touch  with  the  London  market  than  with  any 
other.  Bankers  in  the  Orient  keep  in  rather  inti- 
mate communication  with  the  English  market, 
while  they  scarcely  know  anything  of  the  cur- 
rent condition  of  the  New  York  market.  These 
circumstances  have  resulted  in  habits  of  long 
standing  regarding  the  buying  of  bills  on  London, 
and  it  is  useless  to  oppose  them. 

(2)  The  exporter  in  Java  may  not  care  to  send 
his  goods  if  he  has  to  sell  his  bill  on  New  York, 
because,  upon  arrival  of  the  goods  in  New  York, 


200  PRACTICAL  BANKING 

the  purchaser  may  refuse  to  pay  the  draft  on  some 
pretext.  In  that  event  the  seller  has  a  cargo  on  his 
hands  in  New  York  but  no  cash  credit.  In  such  a 
case  the  cargo  might  easily  prove  a  loss  to  him. 

(3)  The  importer  himself  does  not  desire  a  bill 
on  him  directly,  since  it  would  arrive  before  the 
goods  and  would  have  to  be  paid.  This,  then, 
would  defeat  the  very  reason  he  had  for  not  de- 
siring to  pay  in  cash. 

Thus,  we  have  a  pretty  problem.  The  Java  mer- 
chant, the  Java  bank,  the  American  importer  find 
it  undesirable  to  utilize  what  seems  to  be  the  most 
natural  means  of  transacting  the  affair.  Handling 
the  deal  through  England,  on  the  other  hand, 
would  be  satisfactory  to  all.  Happily  the  problem 
is  solved,  by  the  "  commercial  letter  of  credit." 

The  New  York  merchant,  when  he  contem- 
plates this  purchase,  goes  to  his  bank,  to  get  a 
commercial  letter  of  credit.  His  bank  should  be 
an  institution  of  wide  reputation.  It  authorizes 
its  London  correspondent  to  accept  a  bill  for 
sixty  or  ninety  days  when  drawn  by  the  Java 
exporter  and  attached  to  the  proper  documents 
such  as  bills  of  lading,  marine  insurance,  etc.  It 
then  authorizes  the  Java  merchant  to  draw  on 
London,  under  certain  conditions,  for  the  amount 
of  the  credit.  This  credit  is  the  letter  of  credit 
described  above.  The  New  York  merchant  sends 
this  authorization  in  the  form  of  the  bank's  letter 
to  the  Java  merchant  with  his  order. 

Assume  that  the  Java  merchant  draws  his  bill 
for  ninety  days  on  London,  attaching  all  specified 
documents  and  the  letter  of  credit.  He  takes  it 
to  his  bank,  which  discounts  it  for  him  at  the 


FOREIGN  EXCHANGE  201 

current  rate  for  London  bills.  It  then  forwards  the 
bill  to  its  agent  in  London,  who  immediately  pres- 
ents it  to  the  New  York  bank's  correspondent  for 
acceptance.  Upon  acceptance,  the  accompanying 
documents  are  surrendered.  They  are  forthwith 
shipped  to  the  New  York  bank,  which  turns  them 
over  to  the  merchant  in  time  to  receive  his  cargo. 

The  New  York  merchant  receives,  sells,  and 
delivers  his  goods.  With  the  proceeds  he  must 
remunerate  the  bank  in  time  to  pay  the  bill  ma- 
turing in  London  in  ninety  days.  The  bank,  of 
course,  charges  for  this  extension  of  its  credit  to 
the  merchant.  The  commission  varies  as  the  value 
to  the  bank  of  the  merchant's  patronage  and  as 
his  financial  responsibility.  As  it  is  a  matter  of 
negotiation  there  is  no  definite  charge. 

For  a  moment  let  us  watch  the  accepted  paper 
in  London.  It  is  quite  an  acceptable  and  negoti- 
able paper,  being  signed  by  the  Java  merchant, 
indorsed  by  his  banker  and  the  London  agent,  and 
lastly  accepted  by  the  New  York  bank's  London 
correspondent.  With  ninety  days  to  run  after  its 
acceptance,  it  is  in  all  probability  sold  to  one  of 
the  London  discount  houses  which  make  a  spe- 
cialty of  discounting  acceptances.  When  the  bill 
is  sold  the  London  agent  credits  his  Java  client, 
who  is  thereby  reimbursed  for  the  amount  which 
he  advanced  to  the  exporter. 

Just  prior  to  the  maturity  of  the  bill  the  New 
York  bank,  which  has  meanwhile  been  repaid  by 
the  importing  merchant,  draws  its  demand  bill 
on  London  to  meet  the  maturing  long  bill.^ 

*  The  above  transaction  has  been  suggested  by  Margraff,  supra, 
and  by  Strauss,  supra. 


202  PRACTICAL  BANKING 

The  whole  difficulty  has  thus  been  overcome. 
By  the  New  York  bank's  extension  of  credit  to 
the  merchant,  forming  a  debt  for  which  it  does 
not  itself  have  to  answer  till  the  end  of  ninety 
days,  the  merchant  has  been  able  to  trade  on  a 
cash  basis.  There  is  no  difficulty  in  getting  the 
bill  discounted  in  London,  since  it  has  become  a 
first-class  negotiable  instrument. 

What  is  true  of  London  in  the  matter  of  com- 
mercial letters  of  credit  is  also  true  of  Berlin, 
Paris,  and  Amsterdam. 

We  might  further  point  out  that  under  cer- 
tain conditions  these  long  bills  discounted  by  the 
London,  Paris,  and  Berlin  discount  houses  could 
be  rediscounted  at  the  Bank  of  England,  the 
Reichsbank,  or  the  Banque  de  France.  These 
banks  control  the  private  discount  rate  as  well 
as  their  own,  for  when  too  great  a  volume  of  bills 
accumulates  they  simply  raise  the  discount  rate, 
and  further  transactions  of  the  kind  are  stopped. 

Foreign  investments,  like  the  foregoing,  how- 
ever, are  not  very  attractive  to  Americans.  We 
must  conclude  that  this  is  because  of  the  enormous 
resources  and  the  ever-increasing  enterprise  of  the 
country,  and  because  of  the  fact  that  the  country 
is  so  sparsely  settled  that  most  of  our  capital  is 
invested  in  home  ventures.  New  York  might  be 
able  to  control  the  world  market  at  times  if  there 
were  a  greater  tendency  to  make  foreign  loans. 
As  it  is,  our  harvest  frequently  enables  us  to 
exercise  considerable  influence  on  prices. 

Mr.  Strauss  says:  "Until  it  [New  York]  has 
acquired  a  vast  amount  of  fluid  capital  ready  to 
seek  temporary  investment  in  the  best-paying 


FOREIGN  EXCHANGE  203 

market,  it  will  not  be  a  financial  arbiter  among 
nations."  The  Americans  have  been  strangely 
suspicious  in  their  foreign  investments,  and  yet 
they  certainly  possess  daring  enough  for  anything, 
to  judge  from  some  of  the  wild  investments  made 
in  home  enterprises  whose  stock  has  been  judici- 
ously watered,  etc.  Transactions  like  the  dis- 
counting of  the  Java  bill  have  never  appealed 
greatly  to  their  fancy.  We  must  again  conclude 
that  the  virgin  resources  of  our  country  have 
proved  the  attraction  which  has  worked  against 
our  having  a  city  controlling  in  world  finance. 

The  provisions  of  the  Federal  Reserve  Act  will 
undoubtedly  tend  to  encourage  foreign  invest- 
ments of  the  kind  just  described.  Banks  and 
federal  reserve  banks  will  discount  acceptances 
based  on  the  exportation  and  importation  of 
goods.  Banks  that  are  members  of  the  reserve 
system  are  authorized  to  accept  drafts  against 
them  based  on  the  importation  and  exportation 
of  goods.  ^ 

VIII 

Merchants  or  tourists  going  abroad  wish, 
usually,  to  have  some  convenient  exchange  which 
they  can  easily  convert  into  cash,  in  part  or  en- 
tirely. The  traveler's  check,  issued  by  bankers 
and  express  companies,  fulfills  this  demand  to  a 
certain  extent,  but  the  traveler's  letter  of  credit, 
issued  by  many  prominent  banks  in  this  country, 
seems  at  present  to  be  the  most  popular  mode  of 
carrying  the  desired  credit  abroad,  any  part  of 
which  may  be  collected,  practically  at  any  place. 

^  See  chapter  on  "The  Federal  Reserve  Act,"  p.  258  et  seq. 


204  PRACTICAL  BANKING 

The  letters  are  usually  drawn  in  pounds  ster- 
ling, and  the  drafts  against  credit  are  consequently 
directed  to  the  New  York  bank's  correspondent 
in  London. 

The  following  is  a  form  used  for  travelers* 
letters  of  credit :  — 

FIRST   NATIONAL   BANK   OF   NORTHPORT, 

INDIANA. 

Northport,  Ind 19. . 

No.... 

Sterling. 

To  the  Manager:  — 

This   letter    will    introduce    to    you 

M 

in  whose  favor  we  have  opened  a  credit  of 

Sterling, 

and  whose  sight  drafts  to  that  extent  upon 

Bank 

of  London,  we  engage  shall  meet  with  due  honor,  if 
negotiated  within. .  .  months  from  this  date. 

The  amount  of  each  payment  please  indorse  on 
this  letter,  and  your  negotiation  of  the  draft  will  be 
considered  a  guaranty  that  the  requisite  indorse- 
ments have  been  made. 

You  will  observe  that  all  such  drafts  be  drawn 
against  the  letter  of  credit  of  the  First  National 
Bank  of  Northport,  No. .  .  This  letter  must  be  at- 
tached and  remitted  with  the  last  draft. 

Recommending  M 

to  your  usual  courtesy. 

Very  truly  yours. 

To  Messieurs,  our  correspondents,  and  all  other 
banks  or  bankers  to  whom  this  credit  may  be  pre- 
sented. 


FOREIGN  EXCHANGE 


205 


{Reverse  side.) 


Paid  by 


Amount  in  letters 


Amount  in  figures 


Along  with  the  letter,  but  usually  separate  from 
it,  is  a  list  of  the  agents  of  the  issuing  bank 
throughout  the  world  who  will  negotiate  a  part 
or  all  of  the  draft.  On  this  list  is  a  card  which 
introduces  its  bearer  as  the  holder  of  letter  of 
credit  so  and  so. 

It  is  customary  to  engage,  as  one's  agents  for 
the  purpose  of  negotiating  letters  of  credit,  the 
foreign  correspondents  of  one's  London  agent,  in- 
asmuch as  all  the  drafts  are  to  be  made  payable 
by  him. 

The  London  bank  is  immediately  advised  of  the 
issue  of  a  letter  of  credit,  is  furnished  with  the 
signature  of  the  letter's  owner,  and  is  instructed  to 
pay  drafts  signed  by  this  person  in  certain  amounts. 

The  holder  of  the  letter,  if  he  be  in  Berne, 
Switzerland,  say,  goes  to  the  office  of  the  banker 
noted  in  his  list.  There  his  card  of  introduction 
and  possession  of  the  letter  are  sufficient  to  obtain 
payment  of  any  part  of  the  draft  he  desires.  The 
banker  pays  him  the  money  and  receives  a  draft 
on  the  London  bank  signed  by  his  customer.  He 
then  notes  on  the  back  of  the  letter  the  amount 
paid  and  the  transaction  is  ended. 

When  the  draft  is  presented  for  payment  in 
London,  the  signature  is  looked  up,  and,  if  cor- 


206  PRACTICAL  BANKING 

rect,  the  draft  is  paid  and  charged  to  the  issuing 
banker's  account.  It  is  then  forwarded  to  him. 
The  issuer  of  the  letter  of  credit  charges  it  against 
the  credit  which  the  purchaser  of  the  letter  has 
created  for  the  purpose. 

IX 

Although  all  the  European  countries  handle 
American  accounts  on  practically  the  same  basis, 
there  is  some  dissimilarity  of  detail. 

When  we  glance  over  the  foreign  money 
markets,  we  have  no  difficulty  in  agreeing  that 
England  is  paramount.  There  are  more  trans- 
actions of  bankers  through  London  than  through 
any  other  city  in  the  world,  and,  as  a  natural 
consequence,  Americans  keep  their  most  import- 
ant accounts  in  London,  Therefore  the  London 
account  deserves  first  place  in  our  discussion. 

The  great  Bank  of  England  is  the  most  power- 
ful instrument  in  finance.  By  its  discount  rate  it 
has  a  distinct  influence  on  the  whole  world.  The 
discount  rate  of  the  Bank  of  England  is  the  lowest 
point  at  which  it  will  discount  bills  for  English 
bankers.  It  is  fixed  at  a  meeting  of  the  board  of 
governors  which  convenes  every  Thursday.  In 
times  of  panic  or  financial  uneasiness,  meetings 
are,  of  course,  more  frequent.  "This  rate  acts  as 
the  barometer  of  the  financial  conditions  of  the 
various  nations,  and  any  factors  of  political  or 
financial  significance  are  reflected  by  its  course."  ^ 

In  tabular  form  the  discount  rate  of  the  Bank 
of  England  performs  the  following  important 
functions :  — 

1  Margraff,  supra. 


FOREIGN   EXCHANGE  207 

(1)  It  protects  the  gold  reserve  by  an  advance 
in  the  rate. 

(2)  It  regulates  the  discount  rate  of  the  open 
market  in  Great  Britain  on  bills. 

(3)  It  establishes  its  own  minimum  discount 
rate. 

(4)  It  may  affect  the  value  of  foreign  bills  in 
all  countries  since  it  may  cause  a  lower  or 
higher  exchange  rate  on  sterling  drafts,  and 
therefore  depreciates  or  enhances  the  value 
of  long  bills  by  an  increase  or  reduction  of 
its  foreign  discount  rate. 

(5)  It  determines  the  rate  of  interest  allowed 
on  credit  balances  in  London  and  the  rate 
charged  on  debit  balances  or  overdrafts, 
since  these  are  from  one  half  to  one  and 
one  half  per  cent  higher  and  lower  than  the 
bank's  rates. 

(6)  It  fixes  the  rate  of  interest  of  the  joint- 
stock  companies  on  short-time  deposits, 
inasmuch  as  this  is  usually  one  and  one 
half  per  cent  below  it. 

Unlike  some  of  the  European  countries,  Eng- 
land charges  a  commission  on  all  business  handled 
except  cash  items  sent  for  credit  and  unaccom- 
panied by  documents.  There  is  no  definite  rate, 
and,  as  it  is  a  matter  of  negotiation,  the  larger  and 
more  prominent  the  bank,  the  better  arrange- 
ment it  will  doubtless  be  able  to  make. 

Documentary  payment  bills  are  those  long  bills 
from  which  the  documents  will  not  be  detached 
until  payment.  These  may,  however,  be  taken 
up  before  maturity  by  the  drawee.  In  the  Eng- 
lish market  such  bills  cannot  be  discounted,  as 


208  PRACTICAL  BANKING 

their  liability  to  be  paid  makes  them  undesirable 
investments.  The  rate  at  which  the  interest  on 
these  is  rebated,  if  they  are  taken  up  before 
maturity,  is  called  the  "retirement  rate  of  dis- 
count" in  England.  It  is  calculated  for  the  un- 
expired time  of  the  bill  and  is  usually  one  per 
cent  below  the  Bank  of  England  discount  rate. 

Owing  to  the  branch  banking  system  in  Eng- 
land, it  is  only  necessary  to  open  an  account  with 
a  prominent  London  bank  to  have  facilities  for 
carrying  on  business  throughout  the  country. 
The  branch  banking  system  is  in  vogue  rather 
generally  among  European  countries. 

If  one  wishes  accommodations  in  France,  one 
can  very  well  succeed  by  having  an  account  v/ith 
a  Paris  bank  of  importance.  But  many  large 
American  banks  find  it  convenient  to  carry  ac- 
counts with  banks  in  more  than  one  city.  The 
same  holds  true  in  Germany.  The  French  ac- 
count is  comparatively  an  expensive  one,  for 
besides  a  commission  for  handling  one's  business, 
overdrafts  cost  a  higher  rate  than  in  any  other 
country.  Checks  drawn  against  this  account  are 
charged  on  the  day  that  the  advice  of  their  issue 
is  received  in  Paris.  There  is  frequently  a  con- 
siderable loss  of  interest  thereby.  The  French 
market  will  discount  the  documentary  payment 
bills  which  the  English  market  refuses. 

The  German  branch  system  of  "Filialen" 
insures  one  of  banking  facilities  throughout  the 
empire  if  one  carries  an  account  with  a  prominent 
Berlin  bank. 

Though  the  Germans  do  not  charge  commis- 
sions for  handling  accounts,  they  make  amends 


FOREIGN   EXCHANGE  209 

for  this  shortcoming  by  charging  checks  to  their 
accounts  as  soon  as  advice  of  their  issue  arrives, 
and  by  beginning  the  payment  of  interest  on 
credits  from  the  day  after  remittances  are  credited. 

If  a  bill  is  discounted  in  the  German  market 
for  M.  10,000  or  more,  discount  is  figured  at  the 
Reichsbank  rate  for  the  last  five  days  of  its  life; 
if  it  be  for  less  than  M.  10,000,  interest  at  the 
Imperial  Bank  rate  is  charged  for  the  last  ten  days 
of  its  life. 

The  three  foregoing  accounts  —  the  English, 
German,  and  French — absorb  by  far  the  greater 
part  of  American  business.  Our  trade  with  other 
foreign  countries  is  immense,  but  is  mainly 
banked  through  these  countries.  They  have  been 
aptly  called  the  "clearing  houses  of  nations." 

The  fundamental  principles  of  the  banking 
systems  of  the  other  European  countries,  from 
Denmark  and  Scandinavia  through  Holland  and 
Austria  to  Italy,  are  the  same.  Holland  offers, 
by  means  of  correspondents  and  branches,  the 
same  facilities  as  do  Switzerland  and  Italy  with 
their  branch  banking. 

Our  exports  to  Italy  are  on  the  increase,  and 
so  we  frequently  accumulate  larger  credits  there 
than  are  necessary.  These  are  remitted  every  so 
often  to  some  European  correspondent,  usually 
the  French,  where  the  funds  are  more  serviceable. 
Italy  charges  about  one  fourth  per  cent  for  col- 
lecting bills  and  remitting  the  proceeds  to  Paris. 

Bills  on  Russia  are  not  greatly  in  demand  in 
this  country.  Indeed,  there  is  no  present  means 
of  directly  supplying  such  a  demand  in  great 
quantity,  —  save    by  actual  deposit  of    credits 


210  PRACTICAL  BANKING 

there,  —  for  we  export  little  to  Russia  direct, 
and  few  American  banks  have  affiliations  there. 

Foreign  exchange,  then,  consists  of  the  results 
of  world  intercourse.  The  more  we  trade  with 
each  other,  the  more  we  visit  the  places  of  beauty 
and  fame  in  each  other's  lands,  the  more  we  come 
to  trust  and  believe  in  each  other,  the  greater 
will  become  this  phase  of  banking.  And  it  is  on 
the  steady  increase.  It  has  gained  such  momen- 
tum now  that,  though  it  may  be  retarded,  it  may 
not  be  stopped.  As  we  approach  the  world  or 
international  epoch  in  our  history,  this  commer- 
cial, social,  and  intellectual  intercourse  between 
nations  increases.  The  modern  means  of  rapid 
transportation  and  communication  both  on  land 
and  sea  are  making  the  lands  of  the  earth,  though 
separated  by  thousands  of  miles  of  ocean,  next- 
door  neighbors.  We  are  being  brought  together 
by  bonds  —  social  and  commercial  —  which  can- 
not be  broken. 

It  is  not  uninteresting,  therefore,  to  have  dis- 
cussed and  studied  one  of  the  great  early  pro- 
ducts of  general  international  intercourse  —  the 
foreign  exchanges.  Their  importance  to-day  is 
so  vast  that  prominent  banks,  be  they  in  the 
center  of  the  country  or  in  one  of  the  great  sea- 
ports, are  making  affiliations  with  foreign  insti- 
tutions. Some  time  in  the  future  it  will  be  just  as 
important  that  an  American  bank  have  its  Lon- 
don agent  as  it  is  now  that  it  have  its  New  York 
agent. 


CHAPTER  XIX 

CRISES  IN  THE  UNITED  STATES 


To-day,  seven  years  after  the  last  great  crisis 
in  the  United  States,  one  hears  occasional  re- 
echoes of  the  crash.  The  country  is  emerging 
from  the  depression  succeeding  that  crisis,  and 
one  is  tempted  to  ask:  "What  are  crises?  How 
do  they  arise?  Are  they  necessary  evils,  like 
lightning  which  comes  to  clear  a  torrid  atmo- 
sphere?" 

These  are  matters  which  it  is  proposed  to  broach 
in  this  chapter,  and,  together  with  a  succinct 
sketch  of  the  history  of  financial  disturbances  in 
the  United  States,  to  seek  some  conclusion  as  to 
the  nature  of  crises.  For  our  purpose  it  will  be 
more  satisfactory  to  discuss  a  few  results  of  in- 
vestigations into  crises  and  their  composition 
than  to  launch  ourselves  bodily  forth  into  an 
almost  illimitable  analysis  of  detail.^  Within  the 
scope  of  this  volume  it  will  be  possible  only  to 
state  the  case,  as  it  were,  in  chapter  heads. 

There  is  no  phase  of  banking  which  is  more 
alluring  to  the  historically  practical  mind  than 
the    subject    of    those    mysterious    disturbances 

^  For  those  who  would  study  figures  and  enter  minutely  Into  ana- 
lytical research,  most  of  the  books  cited  in  footnotes  in  this  chapter 
will  offer  a  tempting  starting-point,  especially  Charles  A.  Conant, 
A  History  of  Modern  Banks  of  Issue,  and  Wesley  C.  Mitchell,  Busi- 
ness Cycles. 


212  PRACTICAL  BANKING 

which  have  visited  us  every  ten  or  a  dozen  years 
in  the  form  of  a  contraction  of  loans,  a  scarcity 
(sometimes)  of  currency,  a  lost  stock  exchange 
equilibrium,  a  derangement  of  relative  credits, 
both  in  domestic  and  foreign  exchanges.  Why, 
in  the  midst  of  piping  prosperity,  need  and  dis- 
tress should  seize  our  financial  and  economic  sys- 
tem—  that  is  the  question. 

It  has  not  been  adequately  answered.  There 
exists  a  wide  difference  of  opinion  among  practi- 
cal financiers  and  theoretical  economists.  But 
one  point  has  been  settled:  the  old  notion  that 
crises  are  abnormal  phenomena  is  abandoned. 
"On  the  contrary,  explanations  in  favor  to-day 
ascribe  the  recurrence  of  crises  after  periods  of 
prosperity  to  some  inherent  characteristic  of 
economic  organization  or  activity.  .  .  .  The  in- 
fluence of  special  conditions  is  admitted,  of  course, 
but  rather  as  a  factor  which  complicates  the  pro- 
cess than  as  the  leading  cause  of  crises."  ^  That 
is  to  say,  by  the  very  nature  of  our  mode  of  pro- 
ducing and  consuming,  "business"  moves  in  a 
circle  from  prosperity  to  a  crisis  to  a  depression; 
then  to  prosperous  and  booming  times  again. 
This  seems  to  be  the  order,  although  artificial 
causes  may  intervene,  as,  for  instance,  to  bring 
or  end  a  crisis  sooner  than  would  occur  under  the 
rule.  Then,  too,  each  circle  or  cycle  —  consisting 
of  prosperity,  crisis,  and  depression  —  is  different 
from  every  other  one  in  circumstances.  For  ex- 
ample, in  1837,  $100,000,000  worth  of  new  canals 
in  a  few  years  had  boomed  certain  enterprises 
and    investments.     In    1873,   it   was   said    that 

'  Mitchell,  supra,  p.  6. 


CRISES  IN  THE  UNITED  STATES    213 

extensive  railroad  construction  contributed  to  the 
overextension  of  credit;  in  1893,  a  wild  scramble 
toward  real  estate  and  city  development.^ 

What  we  are  interested  in  does  not  compre- 
hend an  economic  study  of  the  endless  details 
which  enter  into  the  evolution  of  the  three  essen- 
tial elements  of  a  business  cycle.  Nevertheless,  we 
shall  do  well  to  remember  that  underlying  every 
crisis  there  are  scores  of  economic  forces,  which 
we  but  little  understand,  and  over  which  there  is, 
at  present,  great  controversy.  This  much  seems 
to  be  settled:  prosperity  begets  a  crisis  with 
dramatic  resistlessness;  a  crisis  is  followed  by  a 
period  of  general  depression  just  as  inevitably; 
finally,  prosperity  is  again  brought  into  exist- 
ence.^ 

*  Conant,  supra,  pp.  672-73. 

^  Wesley  Clair  Mitchell,  in  his  book  Business  Cycles  (University 
of  California  Press,  1913),  has  made  the  most  complete,  up-to-date 
study  of  statistics  relating  to  the  course  which  economic  conditions 
take.  He  has  massed  in  the  beginning  a  summary  of  the  explana- 
tions offered  by  leading  writers  on  the  subject,  a  few  of  which  are 
here  digested  to  throw  some  light  on  contemporary  theories :  — 

W.  H.  Beveridge,  in  his  volume  on  Ujiemployment,  says  that  busi- 
ness cycles  are  due  to  the  "simple  and  well-nigh  universal  fact  of 
industrial  competition."  He  says  that  in  times  of  prosperity  com- 
petition tends  to  overload,  to  "glut"  the  market.  When  goods  can- 
not be  sold,  the  whole  structure  of  commerce  and  industry,  thus  sup- 
ported, threatens  to  topple  or  topples.  A  crisis  is  at  hand,  to  be  fol- 
lowed by  a  period  of  depression  which  continues  until  the  demand 
exceeds  the  supply,  when  competition  begins  in  earnest,  anew. 
R.  E.  May  {Das  Grundgesetz  der  Wirtschaftskrisen)  explains  the 
"glutting"  of  the  market  by  saying  prices  in  times  of  prosperity 
rise,  whereas  the  growing  output  of  production  can  only  be  sold  if 
prices  are  low. 

An  interesting  theory  is  advanced  by  A.  Aftalion  {Essai  d'une 
thiorie  des  crises  gSnSrales  et  p6riodiques),  who  sets  aside  the  objec- 
tion to  an  "overproduction"  theory  on  a  basis  of  marginal  utilities. 
He  says  that  production  increases  in  good  times,  but  that  there 


214  PRACTICAL  BANKING 

All   the  authorities   cited  below   analyze  the 
situation  more  or  less  accurately,  but  none  are 

comes  a  time  when,  though  all  human  wants  may  not  be  gratified, 
they  are  sufficiently  gratified  from  goods  on  the  market  to  cause  the 
marginal  utility  of  the  goods  (that  is,  their  potentiality  to  sell  at 
some  profit)  to  decline.  A  general  fall  in  prices  ensues.  So,  in  good 
times  the  rise  in  prices  grows  out  of  the  relative  scarcity  of  goods  in 
relation  to  the  community's  wants.  Then  M.  Aftalion  answers  the 
query,  "Why  this  over-  and  under-production?"  The  cause,  he 
says,  lies  in  the  awkward  methods  of  capital.  Where  a  promising 
field  opens  itself,  capital  flows  in  in  volumes  and  prepares  to  supply 
the  field.  High  prices  prevail.  But  after  the  new  factories  are  com- 
pleted and  have  begun  to  produce,  the  time  is  short  before  the 
market  becomes  overstocked.  Then  the  crisis  appears,  followed  by 
a  depression.  When  some  machinery  has  gone  out  of  repair,  without 
replacement,  and  some  factories  have  closed;  in  fine,  when  produc- 
tion is  again  less  than  the  demand,  good  times  return. 

Hobson  {The  Industrial  System)  has  a  theory  of  "oversaving." 
Since  a  considerable  proportion  of  capital  invested  and  wealth  pro- 
duced belongs  to  a  comparatively  small  class,  its  income  rises 
more  rapidly  than  its  consumption,  there  always  being  a  limit  of 
consumption,  no  matter  how  affluent  the  consumer.  Therefore  the 
reinvestment  of  this  surplus  of  capital  has  a  tendency  to  "glut"  the 
market.  M.  Bouniatian  {Studien  zur  Tkeorie  und  Geschichte  der 
Wirtschaftskrisen)  has  a  theory  of  overcapitalization  resembling 
Hobson's  oversaving. 

George  H.  Hull  {Industrial  Depressions)  maintains  an  enthusi- 
astic thesis.  It  is  bristlingly  practical.  Agriculture,  commerce,  and 
finance,  says  he,  fluctuate  within  relatively  narrow  limits.  Agricul- 
ture provides  the  necessities  of  life;  commerce  distributes  them,  and 
finance  pays  the  accounts.  On  the  other  hand,  he  continues,  indus- 
try fluctuates  greatly.  Three  fourths  of  industry  consists  in  con- 
struction. Of  this  construction  two  thirds  is  necessary,  the  rest 
optional.  Optional  construction  is  undertaken  when  investors  can 
see  a  goodly  profit  in  so  doing.  The  necessary  plus  the  optional  con- 
struction causes  a  boom  and  prices  of  construction  go  up.  Shrewd 
investors  then  defer  contracting  for  a  time;  prices  tumble.  Hull 
says  industrial  depressions  are  caused  by  high  prices  of  construction 
and  foreshadowed  by  high  prices  of  iron.  He  favors  the  Government 
collecting  and  publishing  monthly  "all  pertinent  information  in 
relation  to  the  existing  volume  of  construction  under  contract  for 
future  months,  and  all  pertinent  information  in  relation  to  the 
capacity  of  the  country  to  produce  construction  materials  to  meet 
the  demand  thus  indicated." 


CRISES  IN  THE  UNITED   STATES    215 

so  comprehensive  as  Mr.  Mitchell.  His  theory  of 
business  cycles  is  so  complete  that  the  writer 
ventures,  in  order  to  provide  a  suitable  back- 
ground for  a  historical  summary  of  crises  in  the 
United  States,  to  give  a  very  brief  review  of  Mr. 
Mitchell's  results. 

He  has  conceived  his  problem  to  be  a  quantita- 
tive one  and  so  has  treated  his  subject  statisti- 
cally. His  clue,  to  begin  with,  is  that  "the  in- 
dustrial process  of  making  and  the  commercial 
process  of  distributing  goods  is  thoroughly  sub- 
ordinated to  the  business  of  making  money." 

Supposing  we  start  at  a  point  where  a  revival 
of  trade  may  be  first  noticed  in  the  business  cycle. 
The  elements  entering  into  industrial  and  com- 
mercial intercourse  are:  low  prices,  reduced  cost 
of  doing  business,  small  profits,  large  bank  re- 
serves, conservative  capitalization,  moderate 
granting  of  credit,  fair  stock  of  goods,  and  cauti- 
ous buying.  Such  conditions  will  be  accompanied 
by  an  increase  in  the  physical  volume  of  trade  — 
slow  but  cumulative.  Then  it  is  only  a  question 
of  time  until  the  momentum  of  increased  trade 
will  convert  a  period  of  dullness  into  one  of  activ- 
ity. It  would  come  slowly  if  left  alone,  but  a 
bumper  crop  or  an  increased  demand  abroad  for 
home  products  is  likely  to  accelerate  the  coming 
of  prosperity.  The  activity  is  contagious  and 
spreads  through  innumerable  lines  of  intercon- 
nection to  industries  other  than  that  which  may 
have  received  the  first  stimulus.  More  labor  is 
used,  more  money  is  borrowed,  profits  are  higher. 
The  resulting  increase  in  incomes  causes  an  ever- 
accelerated  demand  for  every  commodity.    "All 


216  PRACTICAL  BANKING 

this  while  the  revival  of  activity  is  instilling  a 
feeling  of  optimism  among  business  men,  and 
this  feeling  both  justifies  itself  and  heightens  the 
forces  which  engendered  it  by  making  every  one 
readier  to  buy  with  freedom."  Prices  rise.  Then 
producers  begin  to  foresee  orders  exceeding  their 
capacity;  this  raises  prices  in  advance.  "The 
expectation  of  its  coming  hastens  the  advance. 
Buyers  are  anxious  to  secure  or  to  contract  for 
large  supplies  while  the  low  level  of  quotations 
continues,  and  the  first  definite  signs  of  an  up- 
ward trend  of  quotations  brings  out  a  sudden 
rush  of  orders."  In  fine,  the  cumulative  process 
has  converted  a  revival  of  trade  into  intense 
prosperity. 

Meanwhile,  Mr.  Mitchell's  thesis  continues, 
there  is  also  a  slow  accumulation  of  stresses. 
There  is  an  increase  in  the  cost  of  doing  business. 
Higher  rates  of  interest  prevail,  due  to  greater 
demand  for  accommodation.  Salaries  and  wages 
go  up;  equipment  must  be  enlarged  and  improved. 
The  scarcity  of  labor,  necessitating  the  acquire- 
ment of  inferior  workmen,  and  overtime  labor 
decrease  eflBciency,  which,  when  added  to  waste 
in  doing  a  "rushing"  business,  becomes  an  ap- 
preciable item.  Then  a  tension  on  the  bond  and 
money  market  is  felt,  arising  from  the  super- 
abundance of  securities  and  notes  offered.  The 
demand  for  credit  is  growing  beyond  the  ability 
of  accommodation.  Such  manufactories  as  steel 
mills,  iron  works,  lumber  mills,  and  cement 
plants  feel  the  strain  first.  It  is  because  they 
manufacture  industrial  equipment  for  which 
demand  decreases  when  prices  —  as  controlled 


CRISES  IN  THE  UNITED  STATES    217 

by  the  difficulty  of  getting  loans  —  rise.  Con- 
structing companies  and  contractors  are  also 
among  the  first  to  feel  the  result  of  a  tight  money 
market.  As  the  interest  rate  rises  and,  conse- 
quently, security  for  credits  decreases,  and, 
moreover,  as  profits  seem  to  waver,  cautious 
lenders  refuse  to  renew  notes.  Liquidation  sets 
in. 

When  once  this  process  of  liquidation  of  obh- 
gations  has  begun,  piping  times  of  prosperity  are 
doomed  to  give  way  to  a  crisis.  Liquidation  con- 
tinues, partially  because  the  caution  of  some 
creditors  is  contagious,  partially  because  the  pres- 
sure for  payment  is  passed  down  the  line,  as  from 
A  to  B  for  B's  indebtedness  to  A,  then  from  B  to  C 
for  C's  indebtedness  to  B.  The  question  with 
business  men  becomes  not  so  much  one  of  profits 
but  of  solvency.  Since  resources  have  to  be  care- 
fully guarded,  sales  are  not  pushed.  Orders  for 
goods  fall  off.  Business  in  general  decreases;  ex- 
pansion gives  way  to  contraction.  Meanwhile, 
the  demand  for  loans  becomes  more  acute  with 
the  inevitable  result  that  discount  rates  rise  and 
the  value  of  securities  falls. 

Liquidation  continues  steadily,  though  with- 
out any  paroxysms,  until  in  the  chain  some  weak 
link  gives  way,  until  there  is  some  conspicuous 
failure.  Immediately  (under  the  old  system  in  the 
United  States)  intense  alarm  reigns;  banks  are 
frantically  besought  for  loans  and  are  besieged 
by  depositors.  If  the  banks  can  meet  both  de- 
mands without  difficulty,  the  alarm  passes;  other- 
wise it  becomes  a  panic.  In  the  wake  of  the  panic 
there  are  suspended  cash  payments  at  the  banks. 


218  PRACTICAL  BANKING 

the  issue  of  clearing-house  certificates,  hoarding 
of  cash,  and  premium  on  currency.  Interest  rates 
soar.  There  are  bankruptcies  and  —  what  is 
worse  for  the  situation  —  rumors  of  bank- 
ruptcies. 

The  Government  does  what  it  can  by  deposi- 
ting Treasury  funds  with  the  banks.  The  banks 
help  themselves  to  some  extent  by  the  slow  and 
uncertain  process  of  increasing  their  circulation. 
Very  little  cash  money  is  in  circulation;  individu- 
als and  banks  alike  hoard  it. 

The  total  result  is  the  closing  of  many  busi- 
nesses and  the  partial  operation  of  others.  Work- 
men are  discharged,  commodities  are  sold  at 
sacrifice,  and  the  volume  of  business  is  greatly 
contracted. 

Because  of  unemployed  wage-earners,  the  de- 
crease in  savings,  and  the  encroachments  on  the 
incomes  of  those  most  fortunately  situated,  — 
because  of  the  impoverished  ability  to  buy,  — 
consumers'  demands  are  greatly  reduced.  The 
shrinkage  here  goes  down  the  entire  line  during 
the  gradual  period  of  readjustment.  Construc- 
tion is  almost  at  a  standstill.  Now  the  con- 
traction in  the  physical  volume  of  business  be- 
comes cumulative.  Competition  is  keener  because 
there  is  a  reduced  demand.  Pessimism  reigns 
supreme.^ 

When  the  "market"  supply  is  less  than  the 
demand,  or  rather  when  the  consumption  has 
caught  pace  with  production,  —  in  short,  when 
business    has    adjusted    itself    to    new    condi- 

1  It  is  at  tbis  time  that  good  Americans  begin  to  vilify  Washing- 
ton, D.C.,  regardless  of  the  party  in  power. 


CRISES  IN  THE  UNITED   STATES    219 

tions,  —  the  seeds  are  sown  for  a  revival  of  ac- 
tivity.^ 

II.    THE   CRISES   OF    1814   AND    1819 

On  the  31st  of  August,  1814,  the  banks  of 
Philadelphia  suspended  specie  payments  and  on 
the  next  day  the  New  York  banks  did  likewise. 
This  was  the  weak  link  in  the  chain  which  ac- 
companied the  first  great  liquidation  of  credits 
in  the  United  States. 

Owing  to  the  economic  result  of  such  govern- 
mental acts  as  the  Embargo,  the  trade  of  the 
United  States  had  fallen,  until  the  fiscal  year 
ending  September  30, 1814,  indicated  the  smallest 
foreign  trade  in  the  nation's  history.  ^  Also  the 
Government  pursued  a  method  of  borrowing 
instead  of  taxing  to  carry  on  the  War  of  1812, 
which  tended  to  take  investment  capital  out  of 
circulation.  This  reacted  on  the  already  declin- 
ing trade.  Government  expenditures  doubling 
receipts  in  1813  and  1814  exercised  a  bad  psy- 
chological effect  on  business.  But  what  contrib- 
uted as  much,  perhaps,  as  anything  else  to  the 
crisis  of  1814  was  the  establishment  of  a  large 
number  of  state  banks  without  adequate  capital, 
which  emitted  floods  of  poorly  secured  circulating 
notes.  The  growth  of  these  banks  was  encouraged 
by  the  lapse  of  the  charter  of  the  first  United 

^  Of  course,  in  our  limited  treatment  of  the  subject,  we  shall  not 
endeavor  to  trace  all  these  influences,  but  shall  merely  show  the 
principal  trend  of  industry  and  investment  which  eventually  culmi- 
nates in  a  money  stringency  and  a  crisis. 

^  Theodore  E.  Burton,  Crises  and  Depressinns,  pp.  273-76.  The 
total  exports  and  imports  for  the  fi.scal  year  1814  were  $19,602,103, 
as  against  a  total  of  more  than  $42,000,000  in  1790. 


220  PRACTICAL  BANKING 

States  Bank  in  1811.  The  amount  of  specie  in 
the  country  would  not  begin  to  support  the  huge 
volume  of  credit  which  was  extended  by  these 
banks.  "A  veritable  banking  mania  prevailed  for 
several  years  in  the  Middle,  Southern,  and  West- 
ern States."  ^  The  country's  credit  was,  as  it  were, 
on  stilts  which  but  required  some  extraordinary 
event  to  overtopple.  This  event  was  the  capture 
of  Washington  by  the  British,  August  24,  1814. 
After  1814  the  United  States  had  a  period  in 
which  an  unnatural  trade  growth  took  place.  Im- 
ports increased  to  $194,000,000  in  1816,  amount- 
ing to  more  than  twice  the  value  of  the  exports. 
But  this  expansion  relaxed  when  Americans 
found  how  impoverished  they  were.  In  August, 
1819,  there  were  twenty  thousand  unemployed 
in  Philadelphia,  with  a  similar  situation  prevail- 
ing in  other  cities.^  But  while  commerce  and 
industry  had  grown  to  such  proportions  —  as 
compared  with  the  year  1814  —  bank-note  circu- 
lation had  fallen  from  $110,000,000  in  1815  to 
$65,000,000  in  1819.  This  retrenchment  had  been 
induced  partly  by  the  chartering  of  the  second 
United  States  Bank  in  1816  and  its  conservative 
influence  on  speculation,  and  partly  by  the  banks' 
realizing  from  their  experience  in  1814  that  there 
was  not  enough  specie  to  back  the  immense  bank- 
note circulation.  But  the  mischief  was  done. 
Huge  sums  were  invested  in  real  estate  and  other 
speculative  enterprises.  The  contraction  of  the 
currency  caused  a  great  fall  in  prices,  and  ruin 
followed  to  those  dependent  on  bank  accommo- 

^  Conant,  A  History  of  Modern  Banks  of  Issue,  p.  617. 
2  Ibid.,  p.  618. 


CRISES  IN  THE   UNITED   STATES    221 

dation  or  on  the  continuance  of  a  boom  to  realize 
on  their  speculations. 

This  crisis  —  or  series  of  crises  lasting  from 
1814  to  1819  —  is  to  be  set  chiefly  to  the  score  of 
a  defective  monetary  system.  It  shows  how  poorly 
business  and  finance  were  coordinated  in  those 
days  It  has  been  somewhat  improved  to-day. 
In  1814,  observe,  there  was  a  contraction  of  busi- 
ness but  a  huge  supply  of  wretched  currency. 
Business  said,  "Go  to,  we  shall  avail  ourselves  of 
this  credit."  Note  the  resulting  increase  in  im- 
ports. Bankers,  influenced  by  their  experience 
and  curbed  by  the  new  United  States  Bank, 
rapidly  contracted  their  circulation.  Thus  in 
1819  the  situation  was  reversed.  There  was  a 
large  amount  invested  in  business  enterprises, 
but  the  ability  of  the  banks  to  finance  this  in- 
creased business  had  disappeared.  The  banks, 
for  the  reasons  we  have  noted,  had  destroyed 
their  own  ability  to  do  so.^ 

III.    THE   CRISIS   OF   1837 

The  eighteen  years  which  preceded  1837  — 
years  of  international  peace  —  were  years  of 
growing-pains  with  regard  to  territorial  and  busi- 
ness development,  including  the  beginnings  of 
transportation  expansion.  It  was  also  charac- 
terized by  a  leap  in  immigration  figures  as  well 
as  the  negotiation  of  large  foreign  loans.  Manu- 
facturing had  recovered  from  the  depression  fol- 
lowing the  crisis  in  1819. 

^  These  twin  crises  illustrate,  in  a  simple  way,  better  than  any 
others,  how  awkwardly  business  and  finance  tug  at  cross-purposes 
when  there  is  no  centralized  coordination  of  resources. 


222  PRACTICAL  BANKING 

The  Erie  Canal,  finished  in  1825  at  a  cost  of 
more  than  seven  millions,  was  but  one  of  a  large 
number  of  canals;  a  network  of  canals  were 
opened  in  Ohio,  Pennsylvania,  New  Jersey,  and 
Illinios.  Railroad  building  began  in  1830.  The 
highways  were  improved.  It  was  an  era  of  inter- 
nal improvements.  The  canals  tempted  home- 
stead seekers  to  forsake  the  seaboard  and  plunge 
inland  toward  the  rich  interior  farming  lands. 
The  Cumberland  Road  was  black  with  traveling 
settlers.  States  sprang  into  being;  population 
bounded  upward  at  a  rapid  rate.  Between  1820 
and  1840,  the  States  of  Ohio,  Indiana,  Illinois, 
and  Michigan  increased  in  population  from  792,- 
000  to  2,893,000.  In  this  period  was  laid  the 
working  foundation  of  the  United  States  of  to- 
day. There  was  an  increase  in  the  means  of  pro- 
ducing commodities;  likewise,  an  expansion  of 
mineral  and  agricultural  products  due  to  better 
transportation  facilities.  This  tended  to  over- 
speculation  and  overdevelopment. 

Land  speculation  was  the  underlying  cause  of 
the  forthcoming  crisis.  The  Government  was 
lenient  in  exacting  payment  for  lands.  Prospec- 
tive buyers  were  induced,  by  the  jump  in  the 
selling  price  of  the  land,  to  borrow.  They  found 
ready  accommodation  in  the  banks.  It  was  an 
easy-money  time.  Frequently,  the  Government 
redeposited  the  purchase  money  in  the  bank  from 
which  it  was  borrowed;  the  bank  then  loaned  it 
to  another  land  buyer.  It  does  not  require  a  great 
power  of  deduction  to  suspect  speculation.  It 
not  only  existed,  but,  under  these  favoring  con- 
ditions, increased  by  headlong  leaps.  In  1837  the 


CRISES  IN  THE  UNITED  STATES    223 

Government  was  still  selling  land  at  the  early- 
price  of  $1.25  per  acre.  Right  up  to  the  crisis, 
speculators  realized  immediate  profits.  The  fig- 
ures are  in  1834,  4,659,218  acres  were  sold;  in 
1836,  20,074,870  acres.^ 

Land  speculation  was  not  confined  to  the  West, 
but  extended  to  the  cotton  lands  of  the  South. 
Cotton  production  increased  from  536,000  bales 
in  1833  to  916,000  bales  in  1837.2 

By  the  process  of  redepositing  purchase  money 
in  local  banks,  the  United  States  and  these  banks 
became  involved  in  a  network  of  credits;  banks 
were  established  purely  to  carry  on  this  kind  of 
business,  relying  solely  for  their  existence  on  land 
purchasers'  loans.  This  policy  could  be  pursued 
the  more  readily  since,  for  some  years  past,  the 
Government  had  accepted  bank  notes  in  pay- 
ment of  the  public  lands. 

Financial  uneasiness  began  to  be  engendered 
by  the  veto  of  the  bill  to  recharter  the  United 
States  Bank.  The  Jackson  Administration  had 
set  about  to  "  smash"  the  Bank;  it  did  so.^  The 
deposits  were  gradually  withdrawn.  On  Novem- 
ber 1,  1836,  there  were  public  deposits  in  eighty- 
nine  "pet"  state  banks  of  $49,378,000.*  But  the 
causes  of  the  crisis  were  deeper  than  the  poli- 
tical creed  of  Andrew  Jackson  and  his  kitchen 

1  WTiat  an  inflation  this  really  was  may  be  gathered  from  the 
sales  in  1842  after  the  crisis  had  subsided.  In  that  year  the  sales 
amounted  to  $14,17,972,  or  a  little  more  than  a  million  acres. 

"  Davis  Rich  Dewey,  Financial  History  of  the  United  States. 
p.  227. 

*  Jaclcson  was  sincere  in  his  belief  that  the  United  States  Bank 
was  unsound,  saying,  when  he  heard  of  certain  transactions,  "I  tell 
you,  sir,  she's  brpke." 

*  Dewey,  supra,  210. 


224  PRACTICAL  BANKING 

cabinet.    As  Mr.  Conant,  in  his  excellent  work, 
says :  — 

The  crisis  of  1837  in  the  United  States  was  one  of 
the  results  of  that  discounting  of  the  future  in  a  new 
country,  which  results  in  overspeculation  and  the 
sinking  of  capital  in  unproductive  enterprises.  For- 
eign capital  became  available  in  great  quantities  for 
the  use  of  the  American  people  after  the  recovery  from 
the  crisis  of  1825  in  England,  and  specie  imports  kept 
company  with  an  excess  of  imports  of  merchandise, 
amounting  in  seven  years  to  $140,700,000  as  evi- 
dence of  the  heavy  loans  which  Europe  was  willing 
to  make  in  the  United  States.  The  fact  that  the  United 
States  succeeded  in  wiping  out  their  entire  public  debt 
and  accumulating  a  surplus  seemed,^  among  the  finan- 
ciers of  European  countries,  burdened  under  millions 
of  debt  and  annual  interest  charges,  to  be  a  proof  of 
great  prosperity.  ^ 

The  practice  of  receiving  bank  notes  in  pay- 
ment of  public  lands  did  not  appeal  favorably 
to  the  Administration.  On  July  11,  1836,  the 
Treasury  Department  issued  a  "  Specie  Circular" 
in  which  instructions  were  given  to  land  com- 
missioners to  receive  only  specie  in  payment  of 
public  lands.  It  was  believed  that  this  would  re- 
duce or  eliminate  speculation.  It  did  —  some- 
what. But  two  factors  interfered  with  the  success 

1  On  January  1,  1837,  there  was  more  than  $42,000,000  surplus  in 
the  United  States  accounts.  Congress  voted  to  distribute,  as  a  loan, 
among  the  States  according  to  population,  all  save  $5,000,000. 
Three  of  four  projected  installments  were  paid  when  it  was  found 
that  the  Government  could  only  pay  in  state  bank  notes,  and  the 
distribution  was  never  completed.  It  was  not  the  intention  of  Con- 
gress ever  to  collect  the  loan,  and  until  this  day  the  account  (some 
$28,000,000)  is  carried  on  the  books  of  the  Treasurer. 

*  Conant,  supra,  p.  624. 


CRISES  IN  THE   UNITED   STATES     225 

of  the  measure:  first,  speculators  were  those  who 
would  most  likely  have  ready  money;  second,  it 
cut  out  the  props  from  many  banks  in  the  West, 
together  with  their  affiliations  in  many  cases  in 
the  East. 

So  the  speculation  continued,  though  some- 
what abated,  and  many  banks  were  weakened. 
The  situation  was  not  helped  —  rather,  embar- 
rassed so  far  as  the  United  States  Treasurer's  ac- 
counts were  concerned  —  by  the  distribution  of 
the  surplus  already  alluded  to.^  Added  to  the 
other  complications  was  a  change  in  the  ratio  of 
gold  and  silver  by  the  Government  which  threat- 
ened to  take  silver  out  of  circulation  on  account 
of  the  premium  on  it.  The  crisis  was  affected  to 
some  extent  by  the  failure,  in  November,  1836, 
on  the  London  Stock  Exchange  of  the  three  W's, 
which  had  the  closest  credit  relations  with 
America.^  Premonitions  of  a  financial  distur- 
bance seemed  to  be  felt  on  account  of  the  high 
prices  and  expanded  loans.  Popular  meetings  of 
protest  were  held  in  New  York  in  the  early  part 
of  1837,  some  degenerating  into  destructive  riots. 

The  stage  was  set.  Everything  was  ready  for 
the  curtain  to  rise.^ 

The  cue  was  given  in  April,  1837.  One  hun- 
dred and  twenty-eight  failures  occurred  in  New 

^  For  the  effect  on  the  South  and  European  investors  of  the  spec- 
ulations of  Biddle,  president  of  the  United  States  Bank  of  Pennsyl- 
vania, see  Conant,  supra,  p.  627,  and  also  (there  cited)  Juglar,  Dea 
Crises  Commerciales,  etc.,  p.  402,  et  seq. 

^  The  houses  of  Wilkes,  Wilde,  and  Wiggins. 

*  The  crisis  of  1837  was  aggravated  by  the  failure  of  the  American 
wheat  crop.  Exports  of  wheat  fell  off  a  million  dollars,  while  im- 
ports increased  four  and  a  half  millions. 


226  PRACTICAL  BANKING 

York  between  April  1  and  April  11.  Cotton  fell 
fifty  per  cent  in  value.  On  May  10  the  banks  of 
New  York  suspended  specie  payment  and  were 
followed  on  the  next  day  by  banks  in  large  cities 
throughout  the  East.  Within  a  few  days  banks 
all  over  the  country  had  suspended  specie  pay- 
ments. Suspension  of  specie  payments  greatly 
affected  the  Government.  Its  funds  were  de- 
posited in  the  state  banks.  It  could  get  only  bank 
notes.  Besides,  its  accounts  were  low;  Congress 
had  foolishly  distributed  a  handsome  portion  of 
its  surplus.  Public  revenues  fell  off.  On  October 
12,  1837,  Congress  met  in  special  session  to  devise 
means  of  assisting  the  embarrassed  Government. 
It  authorized  the  issuance  of  Treasury  notes, 
pledging  the  credit  of  the  nation.  President  Van 
Buren  advocated  an  independent  treasury,  but  a 
bill  providing  for  this  was  not  passed  until  1840. 
The  Government's  immediate  needs  cared  for, 
it  sought  to  relieve  the  general  distress  by  various 
methods:  it  gave  importers  additional  time  to 
settle  for  their  duties;  it  withdrew  its  deposits 
slowly;  it  required  no  more  interest  on  its  de- 
posits. 

The  distress  occasioned  by  the  crisis  was  deep; 
it  gave  the  entire  country  a  severe  shock.  Previ- 
ous experiences  had  not  compared  with  this  one 
in  magnitude  and  effect.  It  was  not  till  the  latter 
part  of  1838  that  banks  in  general  resumed  specie 
payments.  Indeed,  the  Philadelphia  banks  had 
to  suspend  again  and  were  not  reliable  specie 
disbursers  before  1842.  The  Government's  rev- 
enues had,  as  we  have  hinted,  been  ruined.  From 
$35,000,000  in  1835  and  $50,000,000  in  1836,  they 


CRISES  IN  THE   UNITED  STATES    227 

fell  to  $24,000,000  in  1837.  From  1837  to  1844 
the  Treasury  had  a  deficit,  with  the  exception  of 
the  year  1838  when  there  was  a  small  surplus. 
Altogether  in  these  seven  years  there  was  a  net 
deficit  of  $38,000,000. 

This  crisis  was  like  the  later  ones  and  quite  un- 
like those  of  1814  and  1819.  The  earlier  crises 
were  due  particularly  to  monetary  disorders. 
The  crisis  of  1837  was  merely  localized  in  a  money 
situation.  It  had  a  great  economic  development 
behind  it.  It  even  showed  symptoms  of  an  in- 
dustrial complication,  a  factor  which,  we  shall 
find,  is  of  supreme  importance  in  the  great  crises 
to  follow. 

By  1843  the  end  of  the  depression  was  reached 
and  conditions  looked  up  again. 

IV.    THE   CRISIS    OF   1857 

It  may  seem  inexplicable  to  those  who  have 
become  piously  resigned  to  a  crisis  (usually  with 
that  attendant  money  scramble,  the  panic)  in 
this  country  every  dozen  years  to  observe  that 
our  narrative  leaps  from  1837  to  1857.  Indeed, 
but  for  unusual  —  abnormal,  we  may  say  — 
conditions  there  would  have  been  a  severe  crisis 
about  1848.  In  that  year,  there  was  a  financial 
stringency,  but  no  crisis  of  any  magnitude.  It 
was  a  year  of  crisis  in  Europe,  and  but  for  the 
export  of  huge  food  supphes,  the  United  States 
might  have  suffered.  America  is  always  subject 
to  a  reflection  of  a  European  crisis;  there  are  so 
many  foreign  interests  in  our  securities  and  bor- 
rowing. Again,  we  import  so  largely  from  Europe 
that,  granting  a  crisis  abroad  and  a  lull  in  our 


228  PRACTICAL  BANKING 

exports  therefrom,  we  lose  considerable  gold  re- 
serve. However,  in  1848  we  were  able  to  offset 
the  effect  of  the  crisis  by  our  exportations.  It  has 
been  thought  that  the  Mexican  War  tended  to 
curb  that  superdevelopment,  that  optimistic  cap- 
italizing of  optimism  itself,  which  eventually 
leads  to  a  crisis.  But  the  war's  effect  was  prob- 
ably very  slight.  Two  items,  ^  indeed,  tended  to 
delay  the  crisis.  One  was  the  discovery  of  gold, 
which  in  the  end  helped  lead  to  the  crisis,  in  1848, 
affording  a  new  source  of  development  along  lines 
which  did  not  strain  the  financial  situation.  The 
other  was  the  Crimean  War  (1854-55)  which 
caused  high  prices  for  American  goods. 

On  the  whole,  the  period  from  1838  to  1857  was 
one  of  remarkable  industrial  growth  and  pros- 
perity, marred  only  by  a  couple  of  economic  dis- 
turbances of  no  magnitude.  As  contrasted  with 
canal  digging  during  the  period  of  development 
immediately  preceding  1837,  this  period  was  one 
of  great  activity  in  railroad  building.  In  no  year 
before  1849  had  railway  construction  exceeded 
eight  hundred  miles,  but  in  1856  it  ran  to  3642 
miles.  2  The  total  railway  mileage  had,  in  1857, 
reached  27,000  miles,  of  which  21,000  had  been 
built  in  the  previous  nine  years.^  Consider  the 
financing  necessary  to  construct  21,000  miles  of 
railroad,  —  and  in  nine  years. 

Banks  had  increased  in  numbers  from  715  in 
1847  to  1416  in  1857;  loans  and  discounts  had 
risen  from  approximately  $310,000,000  to  ap- 
proximately $684,000,000;  bank-note  circulation 

*  Cited  by  Burton,  supra,  p.  214. 

2  Burton,  supra,  p.  284.  ^  Conant,  supra,  p.  640. 


CRISES  IN  THE  UNITED  STATES    229 

had  expanded  one  hundred  per  cent  to  $214,- 
000,000.^  "At  all  times  the  proportion  of  specie 
held  by  the  banks  to  their  loans  and  circulation 
was  dangerously  small,  even  when  the  most  con- 
servative management  was  maintained."  ^  A  de- 
fective currency  was  a  feature  of  this  period. 

The  introduction  of  large  quantities  of  foreign 
capital  kept  the  pot  boiling.  As  one  writer  puts 
it,  "Foreign  capital  continued  to  flow  into  the 
United  States  and  the  bubble  of  speculation  to  be 
blown  to  the  extremist  tension." 

In  addition  to  the  construction  of  railroads 
during  the  period  prior  to  1857  and,  indeed,  aid- 
ing and  abetting  railroad  constructing,  the  dis- 
covery of  gold  in  the  United  States  in  1848  played 
a  leading  role  in  developing  the  acute  situation 
leading  to  the  crisis.  The  discovery  of  silver  and 
gold  in  America  soon  after  Columbus's  voyage 
to  the  New  World  had  wrought  a  revolution  in 
the  value  of  money.  The  gold  production  from 
1492  to  1850  had  averaged  about  $9,000,000  per 
year;  imagine  the  impetus  given  trade  by  the 
increase  to  about  $133,000,000  per  year  from  1851 
to  1860.^  This  great  unexpected  addition  to  the 
gold  supply  had  two  effects:  it  hastened  the  set- 
tlement of  a  proper  ratio  between  gold  and  silver, 
and  it  stimulated  commerce  to  an  unusual  and 

'  Conant,  supra,  p.  640.  Circulation  fell  in  1858,  after  the  panic, 
to  $155,000,000,  and  the  specie  held  by  the  banks  rose  from  $58,- 
000,000  in  1857  to  $74,000,000  in  1858  to  $104,000,000  in  1859. 

^  Burton,  supra,  p.  284. 

*  Conant,  supra,  p.  637.  Mr.  Conant  quotes  from  Adolph  Soot- 
beer's  Bimetallism  in  Europe.  From  1493  to  1850  the  estimated 
gold  production  of  the  world  was  $3,150,000,000,  while  from  1851 
to  1885  it  was  $4,250,000,000. 


2S0  PRACTICAL  BANKING 

abnormal  extent.  Strangely,  it  did  not  act  as  a 
strong  agency  to  raise  prices,  although  in  a  well- 
developed  country  this  would  be  the  result.  The 
extraordinary  effort  of  the  newly  discovered  pre- 
cious metal  was  bent  toward  a  "  lateral  expansion 
of  commerce  in  quantity";  that  is,  the  energy 
was  diffused,  not  concentrated. 

It  was  an  era  of  unprecedented  expansion  in 
enterprises  of  all  kinds.  The  effect  of  railroad  con- 
struction and  the  discovery  of  gold,  however,  led 
the  way  toward  overinvestment  which  charac- 
terized the  period. 

There  were  indications  of  a  money  stringency 
several  times  before  1857.  New  business  opera- 
tions swallowed  the  credit  based  on  the  new  gold 
and  asked  for  more.  The  crop  failure  in  the  West 
in  1853  tended  to  arouse  anxiety;  several  banks 
failed  as  a  result.  Lastly,  the  dearness  of  silver  — 
due  to  the  great  quantities  of  gold  —  compli- 
cated the  problem,  as  we  have  seen. 

The  signal  for  the  crash  was  the  failure  on 
August  24,  1837,  of  the  Ohio  Life  Insurance  and 
Trust  Company,  a  corporation  with  offices  jn 
New  York.  The  liabilities  of  this  concern  were 
about  $7,000,000.  As  we  have  observed,  some 
conspicuous  failure  is  enough  to  ignite  a  train  of 
powder.  A  panic  ensued  on  the  Stock  Exchange. 
Then  banking,  unprotected  by  a  safe  currency 
or  a  centralized  reserve,  took  its  ordinary  course : 
money  was  hoarded;  loans  were  procurable  only 
at  an  excessive  interest;  deposits  disappeared 
from  the  banks. 

A  run  was  made  on  the  banks  of  Philadelphia 
in  September,  and  on  the  26th  of  the  month  they 


CRISES  IN  THE  UNITED   STATES    231 

were  forced  to  suspend  specie  payments.  Mean- 
while, the  first  part  of  October  had  seen  several 
important  commercial  failures;  the  Illinois  Cen- 
tral and  other  railroads  were  put  into  receivers' 
hands.  A  run  followed  on  New  York  banks,  and 
they,  too,  suspended  specie  payments,  October 
13.^  The  crisis,  on  the  whole,  was  a  financial 
crisis  and  was  characterized  by  a  large  number 
of  failures.  Prices  of  commodities  tumbled  along 
with  the  depreciation  of  stocks  and  real  estate. 
But  the  succeeding  depression  was  not  long-lived, 
as  we  shall  see. 

This  crisis  has  been  frequently  attributed  to 
the  tariff  of  1857  which  generally  reduced  import 
duties.  It  is  argued  that  the  reduction  of  duties 
stimulated  importations  which  had  to  be  paid  for 
in  specie  and  that  this  drain  inevitably  brought 
the  panic. 

It  is  too  much  to  claim  that  this  widespread  shock 
was  due  to  the  tariff  of  1857  which  had  been  in  opera- 
tion but  for  a  few  months,  or  even  to  the  tariff  of  1846. 
To  be  sure,  imports  had  increased  and  there  had  been 
a  heavy  export  of  specie  to  pay  for  them,  but  at  the 
same  time  the  production  of  specie  in  the  United 
States  had  been  more  than  enough  to  cover  this  de- 
mand and  to  leave  a  generous  amount  in  the  country 
for  domestic  needs  .  .  .  [Also]  in  connecting  cause  and 
effect  it  must  be  borne  in  mind  that  commercial  de- 
pressions have  for  a  century  returned  in  almost  mathe- 
matical regularity,  and  that  it  is  hardly  reasonable 

^  Conant,  supra,  p.  C40,  note:  "The  constitution  of  the  State  of 
New  York  forbade  suspension  of  specie  payments  directly  or  indi- 
rectly, but  the  judges  of  the  Supreme  Court  met  and  agreed  not  to 
grant  any  injunction  unless  the  bank  appeared  to  be  insolvent  or 
guilty  of  fraud." 


232  PRACTICAL  BANKING 

to  hold  alone  responsible  a  tariff  which  had  appar- 
ently brought  no  disturbance  during  a  period  of  ten 
years.  ^ 

V.    THE   CRISIS   OF   1873 

The  depression  which  followed  the  crisis  in 
1857  reached  its  worst  point  in  1859,  and  after 
that  prospects  were  good  for  a  revival.  But  an 
abnormal  event  —  war  —  caused  a  liquidation 
in  the  latter  part  of  1860  and  1861,  thus  delaying 
the  acceleration  of  business  activities.^  On  the 
other  hand,  the  large  number  of  men  engaged  on 
the  battlefield  and  the  impetus  given  certain 
activities  prevented  a  depression. 

The  year  1865  ushered  in  a  period  of  awakening 
industrialism  —  at  least,  in  those  sections  which 
had  been  free  from  the  ravages  of  war.  A  pro- 
tective tariff  fostered  home  manufacturing;  the 
demand  in  this  country  for  American-made  goods 
was  enormous.  Agricultural  products,  of  course, 
were  greatly  in  demand  after  the  exhausting  four 
years,  particularly  since  the  South  was  tempo- 
rarily disorganized  and  comparatively  unproduc- 
tive. "The  return  of  much  more  than  a  million 
men  seemed  to  cause  no  embarrassment.  All 
could  find  employment.    With  slight  reactions  in 

*  Dewey,  supra,  pp.  264-65.  Conant  (p.  638)  quotes  from  Von 
Hoist's  Constitutional  and  Political  History  of  the  United  States 
(vol.  Ill,  pp.  51-52),  to  show  that  the  tariff  had  nothing  to  do  with 
the  crisis ;  he  also  cites  Max  Wirth,  who  makes  no  mention  of  the 
tariff. 

*  The  European  political  situation  in  July,  1914,  caused  a  rapid 
liquidation  of  securities,  so  extensive,  indeed,  that  all  the  stock 
exchanges  in  the  world  closed  to  prevent  the  selling  of  securities  in 
such  quantities  as  to  destroy  values,  and  thus,  in  the  United  States 
at  least,  jeopardize  a  great  portion  of  bank  loans. 


CRISES  IN  THE  UNITED  STATES    233 

1867  and  1869,  the  onward  movement  continued 
until  1873."  ^ 

The  crisis  was  preceded  by  four  years  of  general 
economic  activity.  Manufacturing  and  trans- 
portation facilities  were  greatly  developed,  but, 
as  in  1857,  a  serious  weakness  was  disclosed  in 
railroad  construction.  The  average  increase  in 
railway  mileage  between  1860  and  1867  was  1311 
miles  per  year;  in  1869  it  was  almost  5000  miles; 
in  1870,  5690  miles;  in  1871,  7600  miles;  and  in 
1872,  over  6000  miles.  ^  Bonds  sold  at  a  heavy 
discount.  Many  roads  were  left  partially  com- 
pleted owing  to  inability  to  arrange  finances; 
when  they  were  completed,  they  frequently  could 
not  pay  such  fixed  charges  as  interest  on  bonds. 

The  capital  invested  in  all  varieties  of  enter- 
prises in  the  ten  years  prior  to  the  crisis  was  enor- 
mous. "Facihties  for  the  production  of  certain 
commodities  had  increased  beyond  consumption." 

The  crisis  of  1873  was  due;  mathematically,  it 
was  overdue.  Had  it  not  been  for  the  extraordi- 
nary conditions  of  war,  it  probably  would  have 
come  in  1866  as  a  reflection  of  the  European  sit- 
uation of  that  year. 

The  latter  part  of  1872  and  the  first  half  of 
1873  saw  a  continuous  stringency  in  the  money 
market.  From  September,  1872,  to  May,  1873, 
the  money  "tightness"  prevailed,  "at  times 
almost  prohibiting  the  sale  of  new  railroad  bonds 
and  requiring  the  issue  of  large  amount  of  rail- 
road paper  for  the  prosecution  of  the  several 
enterprises.  Together  with  this  came  the  failures 
of  quite  a  number  of  smaller  railroad  companies 

'  Burton,  supra,  pp.  286-87.  '  Dewey,  supra,  p.  370. 


234  PRACTICAL  BANKING 

to  pay  their  interest,  causing  a  feelmg  of  distrust 
and  aversion  toward  new  railroad  bonds,  which 
has  been  quite  perceptible  for  some  months 
past."  1 

The  crash  came  on  September  8,  when  the  New 
York  warehouse  and  Produce  Company,  which 
was  engaged  in  the  financing  of  the  Missouri, 
Kansas  and  Texas  Railway,  suspended.  Kenyon, 
Cox  and  Company,  who  had  indorsed  $1,500,000 
of  Canadian  Southern  Railroad  paper,  suspended 
on  September  13,  the  reason  being  inability  or 
unwillingness  to  pay  that  part  of  the  paper 
maturing  on  the  15th.  On  the  18th  the  house  of 
Jay  Cooke  and  Company  failed.  This  firm  was 
the  agent  of  the  Government  and  the  leader  of 
the  syndicate  handling  the  refunding  of  the 
public  debt.  This  failure  was  brought  about  by 
heavy  deposit  withdrawals  and  advances  to  the 
Northern  Pacific  Railroad.  The  next  day  Fisk 
and  Hatch,  stock  brokers,  were  forced  to  close 
because  of  the  depreciation  of  securities  on  which 
they  had  call  loans.  A  number  of  stock  exchange 
firms  followed  this  dignified  lead.  Saturday,  the 
20th,  was  a  day  long  remembered  in  Wall  Street. 
The  excitement  in  that  famous  lane  was  unprece- 
dented. Interest  was  somewhat  centered  about 
the  runs  on  the  Fourth  National  Bank  and  the 
Union  Trust  Company.  The  former  succeeded 
in  meeting  all  demands.  A  defalcation  on  the 
part  of  the  secretary  of  the  Trust  Company,  in 
addition  to  an  important  loan  to  the  Michigan 

*  Commercial  and  Financial  Chronicle,  September  20,  1873,  cited 
by  Professor  O.  M.  W.  Sprague,  History  of  Crises  under  the  National 
Banking  System,  National  Monetary  Commission  Series,  p.  36. 


CRISES  IN  THE  UNITED   STATES    235 

Southern  Railway,  brought  the  close  of  its  doors. 
On  the  same  day  the  Commonwealth  Bank  closed. 
Excitement  was  so  high  and  price-slumping  so 
imminent  that  the  Stock  Exchange  was  closed 
at  eleven  o'clock  on  Saturday,  remaining  closed 
until  September  30.^ 

Runs  on  the  banks  took  place  in  Washington, 
Philadelphia,  and  Brooklyn,  nineteen  banks  and 
trust  companies  closing  on  September  19.  "Fail- 
ures followed  each  other  in  quick  succession, 
mills  and  foundries  stopped,  production  ceased, 
and  for  six  years  the  pall  of  depressed  industry 
lay  over  the  United  States.  Deposits  in  the 
national  banks  fell  from  $641,121,775  on  June  13, 
1873,  to  $540,510,602  on  December  26.  Failures 
for  four  years  showed  aggregate  liabilities  of 
$775,865,000,  and  the  railway  bonds  in  default 
on  January  1, 1876,  amounted  to  $789,367,655."  ^ 

The  Secretary  of  the  Treasury  paid  out  $24,- 
000,000  in  the  purchase  of  bonds,  but  little  of  it 
reached  New  York  and  the  Eastern  cities ; ' 
clearing-house  certificates  were  issued,  amount- 
ing in  New  York  to  $26,505,000  and  in  Phila- 
delphia to  $6,785,000. 

It  has  been  pointed  out  that  the  action  of 
the  New  York  City  banks  in  1873  was  quite  the 
reverse,  in  regard  to  reserves,  of  that  in  1893  and 

*  This  was  the  only  closing  in  the  history  of  the  New  York  Stock 
Exchange  until  July  31,  1914,  when,  due  to  the  closing  of  all  the 
important  European  bourses,  it  was  thought  necessary  to  close  in 
order  to  prevent  the  flood  of  selling  orders  from  Europe  overturning 
prices.  The  closing  of  the  Consolidated  Stock  Exchange  and  the 
Curb  Market  of  New  York  followed,  as  did  that  of  the  exchanges  all 
over  the  country. 

*  Conant,  supra,  pp.  G55-56.  '  Ibid. 


236  PRACTICAL  BANKING 

1907.  In  1873  the  New  York  banks  adopted  not 
only  the  clearing-house  loan  certificate,  but  also 
a  scheme  of  equalizing  reserves,  which  was 
devised  in  1860.  In  this  way,  the  New  York 
Clearing  House  Committee,  having  charge  of  the 
combined  reserves,  enabled  New  York  banks  to 
continue  paying  considerable  cash  to  country 
banks.  New  York  savings  banks,  and  customers, 
although  cash  payments  had  been  authorized  to 
be  suspended  September  24.  The  legal  tender 
reserve  in  the  clearing-house  banks  of  New  York 
was,  on  October  14,  $5,800,000,  having  been 
reduced  from  $34,000,000  on  September  20.^ 
This  bears  eloquent  testimony  to  the  valiant 
efforts  of  New  York  bankers  to  make  good  as  the 
country's  reserve  agents;  their  generous  disburse- 
ments differed  from  bank  action  in  1893  and  1907. 
"In  making  free  use  of  their  reserves  the  Clearing 
House  Committee  exhibited  a  determination  and 
strength  of  purpose  which  cannot  be  too  highly 
praised."  ^ 

Finally,  in  order  to  review  some  of  the  causes 
of  the  crisis,  it  becomes  important  to  glance  at 
the  condition  of  the  national  banks. ^  Did  they 
contribute  too  liberally  with  loans?  Was  the 
proper  relation  of  reserve  to  loans  and  deposits 
disturbed?  From  1869  to  1873  the  number  of 
national  banks  increased  from  1619  to  1968; 
capital  and  surplus  increased  from  $548,000,000 
to  $662,000,000;  and  loans  from  $686,000,000  to 

^  Sprague,  supra,  pp.  155-156.  ^  Ibid. 

'  The  analysis  above  is  a  summary  of  that  advanced  by  Professor 
Sprague  in  his  excellent  monograph,  supra,  p.  4  et  seq.  National 
banks  were  authorized  in  1863  and  for  a  time  there  were  compara- 
tively few  state  banks. 


CRISES  IN  THE  UNITED  STATES    237 

$926,000,000.  The  increase  of  thirty-five  per  cent 
in  loans  is  not  considered  unsafe  in  view  of  tw6 
facts:  first,  $114,000,000  addition  had  been  made 
to  the  working  capital;  second,  eighty-nine  per 
cent  of  the  new  banks  were  established  in  the 
South  and  West,  which  were  poorly  supplied 
with  banks.  ^ 

Finally,  it  should  be  noted  that  in  New  York,  where 
the  railroads  were  largely  financed  and  where  the 
failures  occurred  which  precipitated  the  crisis,  there 
was  strikingly  little  loan  increase  [from  1869  to  1873], 
only  $21 ,000,000  —  from  $174,000,000  to  $195,000,000. 
The  conclusion  seems  clear  that  the  national  banks 
cannot  be  held  very  largely  responsible  for  creating 
unhealthy  conditions  by  an  unwise  policy  of  rapid 
loan  expansion  during  the  year  immediately  preced- 
ing the  crisis  of  1873.2 

The  general  causes  which  led  to  the  disturbances  [in 
1873]  were  so  plain  as  to  eliminate  from  attention  those 
exceptional  features  which  are  often  mistaken  for  the 
true  causes.  There  was  an  enormous  absorption  of  cir- 
culating capital  in  fixed  capital.  Railways,  as  well  as 
docks,  buildings,  and  factories  had  been  constructed 
on  an  unprecedented  scale.  All  the  equipment  for  fu- 
ture production  was  increasing  at  a  more  rapid  pace 
than  ever  before.  In  these  expenditures  we  have  the 
effect  of  capital  invested  for  objects  not  immediately 
remunerative.  The  opening-up  of  wide  areas  of  terri- 
tory in  the  West  for  settlement  by  farmers,  while 
greatly  increasing  agricultural  production,  rendered 
less  valuable,  in  some  cases  almost  useless,  very  large 
tracts  near  to  the  Atlantic  seaboard.  .  .  .  Railroads 
preceded  settlement,  while  in  previous  eras  they  had 
followed  it.^ 

^  Sprague,  supra,  p.  4  et  seq.  *  Ihid.,  p.  4  ef  »eg» 

*  Burton,  supra,  p.  280. 


238  PRACTICAL  BANKING 

The  depression  continued  till  1879.  It  was  a 
period  of  the  blackest  despair.  The  process  of 
readjustment  was  slow  because  development  had 
run  so  far  ahead  of  demand.  Production  seems  to 
have  had  a  uselessly  large  expansion.  After  1879, 
however,  the  country  arose,  shook  off  the  dust  of 
depression,  and,  with  one  or  two  growing-pains, 
leaped  and  bounded  until  1893. 

VI.    PANIC   OF   1884   AND    THE    FINANCIAL 
STRINGENCY   OF   1890^ 

The  panic  of  1884  was  in  the  nature  of  a  finan- 
cial spectacle  and  did  not  involve  all  the  funda- 
mentals of  an  economic  crisis.  There  were  num- 
erous failures  and  general  business  was  for  a  time 
seriously  threatened. 

On  May  5,  the  Marine  Bank  of  New  York 
closed  its  doors;  shortly  afterward  occurred  the 
failure  of  the  Metropolitan  Bank.  Great  excite- 
ment and  uneasiness  attended  the  exposure  of  a 
group  of  bankers  and  their  methods.  Money 
went  to  one  per  cent  a  day;  country  banks  called 
for  their  deposits  and  it  was  hard  to  get  credit 
on  any  security.  Clearing-house  loan  certificates 
were  successfully  used  to  save  the  day. 

The  causes  for  the  panic  may  be  found  in  two 
situations:  first,  a  general  decline  in  business 
activity  in  1883,  following  four  years  of  economic 
expansion.  Reductions  of  stocks  and  the  failure 
of  several  railroads  were  subsequent  to  the  panic. 

*  Whereas,  for  the  purposes  of  this  chapter  "panic"  and  "crisis" 
are  synonymous,  "panic"  is  used  in  this  section  because  it  better 
describes  the  financial  exhibition.  "Panic"  is  frequently  used  in  the 
section  on  the  crisis  of  1907  to  refer  to  the  spectacular  money 
scramble,  the  details  of  which  are  fuller  there  than  elsewhere. 


CRISES  IN  THE   UNITED   STATES    239 

Second,  the  money  question.  The  addition  of  two 
milHon  silver  dollars  each  month  to  the  circula- 
tion alarmed  many  European  investors,  who  sold 
their  securities.  The  tlnited  States  exported 
immense  quantities  of  gold  —  nearly  $30,000,000 
in  March  and  April,  1884.^  The  successive  breaks 
in  the  stock  market  brought  the  failure  of  broker- 
age houses,  with  their  creditor  banks  in  their 
wake.  It  was  known  on  May  13  that  the  president 
of  the  Second  National  Bank  had  stolen  $3,000,- 
000  worth  of  securities. 

But  the  New  York  banks  met  every  demand, 
with  the  exceptions  noted;  the  panic  was  local- 
ized, and,  in  a  few  weeks,  past. 

The  crisis  in  Europe  in  1890,  characterized  by 
the  great  Baring  failure  in  London,  was  converted 
into  a  financial  stringency  in  this  country.  Had 
it  not  been  for  the  excess  of  $68,000,000  of  exports 
over  imports  that  year,  which  cut  down  the  export 
of  gold  to  $4,000,000,  and  the  inflation  of  the 
currency  with  silver  certificates  —  had  it  not 
been  for  these  two  factors,  we  should  probably 
have  had  the  crisis  three  years  earlier. 

Secretary  Windom,  between  June  30  and  Sep- 
tember 30,  disbursed  more  than  $98,000,000  in 
redeeming  unmatured  government  bonds.  This 
was  his  method  of  relieving  the  stringency.  Fail- 
ures occurred  in  November.  The  Treasury  was 
empty. 

VII.    THE   CRISIS   OF   1893 

During  the  period  of  prosperity  preceding  the 
1893  crisis,  the  country  was  on  fire  with  "get- 

^  Sprague,  supra,  p.  109. 


240  PRACTICAL  BANKING 

rich-quick"  schemes  involving  speculation  in 
mineral  and  farm  lands,  oftentimes  cases  of  pure 
fraud.  Suburban  development  began  in  the  shape 
of  city  "additions"  which  have  become  familiar 
to  American  eyes.  Railroads  continued  to  be 
built,  though  not  to  the  extent  which  character- 
ized the  previous  period.  But  electrical  develop- 
ment created  a  demand  for  electric  street  railways. 
It  was  a  period  "booming"  with  optimism  gone 
wild.  Outwardly,  the  country  was  very  prosperous. 
The  English  crisis  of  1890  made  itself  distinctly 
felt  in  the  United  States  in  1893.  After  1890 
Europeans  began  withdrawing  their  loans  and 
returning  American  securities  at  an  alarming 
rate.  Only  the  exportation  of  large  crops  in  1891 
and  1892,  somewhat  offsetting  the  European 
balance,  deferred  the  crisis.  In  1891  there  was,  on 
the  international  ledgers,  a  balance  in  favor  of 
Europe  of  about  $68,000,000,  and  in  1893  this 
balance  —  still  in  favor  of  Europe  —  was  about 
$87,000,000. 

The  withdrawal  of  this  capital  —  even  the  mere  sus- 
pension of  the  process  of  reinvesting  it  —  meant  heavy 
payments  in  gold  or  merchandise  to  Europe  without 
compensation  in  returning  gold  or  goods.  The  with- 
drawal of  a  large  part  of  this  productive  loan  (it  was 
estimated  at  about  two  billion  dollars)  was  the  price 
the  United  States  were  called  upon  to  pay  for  political 
manoeuvres  which  aroused  the  fear  that  they  would 
abandon  the  gold  standard  and  make  silver  the  basis 
of  their  monetary  system.^ 

Why  did  silver  play  a  part?  In  1890  the  Sher- 
man  Silver  Bill  was  passed,  providing  for  the 

*  Conant,  supra,  p.  670. 


CRISES  IN  THE  UNITED  STATES    241 

purchase,  by  the  Secretary  of  the  Treasury,  of 
4,500,000  ounces  of  silver  each  month,  and  the 
issue  therefor  of  Treasury  notes  of  full  legal 
tender  value.  These  were  redeemable  in  silver 
or  gold,  at  the  option  of  the  Secretary  of  the 
Treasury.  The  Treasury  interpretation  of  the 
law  was,  redeemable  in  "gold  or  its  exact  equiva- 
lent." This,  of  course,  obliged  the  Government 
to  pay  practically  gold  for  the  redemption  of 
these  certificates.  At  this  time  the  result  of 
Secretary  Windom's  action  in  buying  unmatured 
bonds  instead  of  depositing  the  funds  in  the 
national  banks  was  realized.  The  Treasury  was 
so  nearly  depleted  that  it  was  not  prepared  to 
withstand  the  demands  made  on  it. 

The  Sub-Treasury  in  New  York  reversed  its 
custom  of  paying  for  its  clearings  in  gold,  which 
had  come  to  be  looked  upon  by  the  banks  as  a 
means  of  maintaining  their  gold  supply.^  In  1890 
the  Treasury  began  paying  its  clearings  with 
Treasury  notes,  and  in  1891  it  "  increased  the  use 
of  the  older  United  States  notes  and  held  on  to  the 
gold  reserve."  The  result  was,  the  banks  presented 
government  notes  for  redemption  in  gold.^ 

1  Dewey,  supra,  pp.  443-44.  In  the  fiscal  year  1889-90,  the  bal- 
ances paid  in  clearings  amounted  to  $230,000,000,  and  in  1890-91 
to  $212,000,000. 

*  Conant,  supra,  p.  671.  The  total  gold  in  the  Treasury  on  June 
SO,  1889,  was  $303,504,319,  of  which  $186,711,560  was  in  reserve; 
on  June  30,  1890,  the  total  was  $321,612,424,  of  which  $190.2.32,405 
was  in  reserve;  on  June  30,  1891,  the  total  was  $238,518,122,  of 
which  $1 17,667,723  was  in  reserve;  on  June  30,  1892,  the  total  was 
$255,577,705.  of  which  $114,342,367  was  in  reserve;  on  June  30, 
1893,  the  total  was  $188,455,432,  of  which  $95,485,413  was  in 
reserve.  The  reserve  continued  to  decline  until  June  30,  1894,  when 
it  was  $64,873,025.  The  difference  between  the  total  gold  and  the 
gold  reserve  represents  the  gold  cerliOcates  outstanding. 


242  PRACTICAL  BANKING 

The  net  gold  exports  from  the  United  States 
from  June  30,  1890,  to  June  30,  1893,  were  more 
than  $156,000,000.  All  this  time  the  Sherman 
law  was  causing  four  and  a  half  million  ounces 
of  silver  to  be  bought  and  placed  in  circulation 
each  month. 

A  special  session  of  Congress  was  called  by- 
President  Cleveland  for  August  7  for  the  purpose 
of  repealing  the  Sherman  Silver  Act.  It  was  high 
time  some  governmental  action  were  taken  regard- 
ing the  situation,  as  we  shall  see.  It  was  October 
30  before  the  repeal  of  the  silver  law  could  be 
forced  through  the  Senate.  President  Cleveland's 
appeal  to  the  national  banks  for  assistance  re- 
sulted in  more  than  $7,000,000  in  gold  being 
added  to  the  Treasury's  reserve  in  June  and 
July. 

Meanwhile,  Bradstreet's  reported  905  failures 
in  April,  1893,  as  compared  with  703  in  April, 
1892;  in  May  they  increased  to  969.  On  May  9, 
the  Chemical  National  Bank,  and  on  May  11, 
the  Columbia  National  Bank,  both  of  Chicago 
and  each  capitalized  at  a  million  dollars,  closed 
their  doors.  Private  and  state  banks  followed;  as 
did  business  firms  and  corporations.  Credit  waw«" 
paralyzed.^ 

Banks  all  over  the  country  refused  to  pay 
checks  except  in  certified  or  clearing-house  checks. 
Currency  was  at  a  premium.  Philadelphia  banks 
issued  clearing-house  loan  certificates  on  June  16; 
New  York  followed  on  June  21;  Boston  and 
Baltimore,  on  June  27.  New  York,  Philadelphia, 
Boston,  Baltimore,  and  Pittsburg  together  issued 

^  Conant,  supra,  p.  674. 


CRISES  IN  THE  UNITED  STATES    243 

$63,000,000  of  clearing-house  certificates.^  Banks 
all  over  the  country  pursued  the  same  course. 

There  were  during  the  year  failures  of  15 
national  banks,  172  state  banks,  177  private 
banks,  47  savings  banks,  13  loan  and  trust  com- 
panies, and  6  mortgage  companies.  Depositors 
were  tremendously  frightened.  The  clearings 
were  the  lowest  since  1885. 

A  general  depression  followed  the  crisis.  The 
output  of  pig  iron  decreased  from  9,157,000  tons 
in  1892  to  6,657,000  tons  in  1894.  New  railroad 
construction  almost  ceased.  In  1894  there  were 
156  railways  —  operating  approximately  39,200 
miles  —  in  the  hands  of  receivers,  among  others, 
the  Erie,  Northern  Pacific,  and  Union  Pacific. 
One  fourth  of  the  country's  railway  capital  was 
in  bankruptcy.  The  commercial  failures  increased 
from  10,344,  in  1892,  with  liabihties  of  $114,000,- 
000,  to  15,242,  in  1893,  with  liabilities  of  $346,- 
000,000.2 

The  problem  of  unemployment  was  acute  and 
widespread.  Food  was  distributed  to  the  needy 
in  the  large  cities.  Labor  strikes  and  riots  char- 
acterized the  distress  in  Chicago.  The  spring  of 
1894  was  one  of  gaunt  want. 

VIII.    THE   CRISIS   OF   1907 

The  depression  subsequent  to  the  crisis  in  1893 
lasted  three  or  four  years.  Industry,  indeed, 
aroused  itself  feebly  in  1895,  but  it  was  in  1897 
that  a  genuine  revival  of  activity  came.  The 
revival  was  not  necessarily  delayed  by  the  presi- 
dential election  in  1896,  although  the  then  pre- 

'  Conant,  supra,  p.  681.  ^  Dewey,  supra,  p.  446. 


244  PRACTICAL  BANKING 

vailing  lack  of  confidence  in  the  retiring  ad- 
ministration may  have  prevented  the  upward 
movement  gaining  cumulatively.  Financiers  and 
manufacturers,  however,  were  generally  pleased 
at  the  outcome  of  the  election,  and  their  optimism 
proved  to  be  the  stimulus  the  country  needed. 

Exports  of  merchandise  increased  by  leaps  and 
bounds,  from  $882,606,938  in  1896  to  $1,394,483,- 
082  in  1900,  and  to  $1,743,864,500  in  1906. ^ 
Imports  rose,  too;  from  $8.05  per  capita  in  1898, 
imports  increased  to  $16.54  per  capita  in  1907.^ 

From  1897  to  1907  the  United  States  experi- 
enced a  corporate  expansion  hitherto  undreamed 
of.  The  railroads  were  a  conspicuous  example. 
There  was  not  a  great  increase  in  mileage  as  com- 
pared with  other  years,  but  improvements  such 
as  the  construction  of  bridges,  double  tracks, 
stations,  and  the  providing  of  better  roadbeds,  — 
new  ballasting  and  grading,  —  the  necessary 
addition  to  equipment  of  more  and  better  engines, 
sleeping-cars,  chair  cars,  vestibuled  coaches,  and 
thousands  of  new  freight  cars,  —  improvements 
of  this  kind  called  for  an  enormous  outlay  of 
capital,  additional  issues  of  stocks  and  bonds. 
In  1905  the  steam  railway  securities  outstanding 
in  the  United  States  amounted  to  the  staggering 
figure  of  $12,600,000,000  par  value. 

But  the  period  was  also  notable  for  growth  of 
enterprises  laterally.  Electrical  supply  plants, 
waterworks,  improved  sanitation,  the  building 
of  great  piers  and  dry  docks,  the  construction  of  a 
giant  navy,  street  railways,  cotton  manufactories, 
automobile  factories,  sky-scrapers,  the  expansion 

'  Conant,  supra,  pp.  698-99.  ^  Ibid. 


CRISES  IN  THE   UNITED  STATES    245 

of  the  great  universities  —  these  required  a  cor- 
porate organization  themselves  and  gave  rise  to 
a  horde  of  corporations  to  supply  equipment. 
Manufacturing  was  promoted  and  protected, 
from  steel  girders  to  shoe  buttons.  There  was 
no  item  of  human  demand  which  was  overlooked. 
Jinrickshas  were  made  in  the  United  States  and 
successfully  sold  in  Japan  in  competition  with 
centuries-old  industry.  So  great  was  American 
energy  and  so  astute  the  manipulation  of  prices 
that,  under  the  beneficent  provisions  of  a  pro- 
tective tariff,  certain  Chicago  hams  were  sold  in 
Johannesburg,  South  Africa,  cheaper  than  they 
could  be  bought  here. 

New  York  saw  a  phenomenal  real  estate  de- 
velopment after  1900;  this  boom  found  its  way 
into  other  parts  of  the  country.  Mining  and  oil 
exploitation  progressed  —  fortunes  were  made  in 
legitimate  and  illegitimate  projects.  It  is  esti- 
mated that  shortly  before  the  crisis  these  inter- 
ests had  outstanding  over  $3,000,000,000  worth  of 
par  value  securities,  ranging  in  prices  on  the  market 
from  ten  cents  per  share  to  two  hundred  dollars. 

Gold  production  increased  in  the  five  years 
preceding  the  crisis  at  an  average  of  over  $371,- 
000,000  per  year.  In  the  period  from  1890  to  1897, 
as  Mr.  Conant  observes,  the  gold  output  reached 
a  mark  more  than  equal  to  half  the  production  of 
the  four  preceding  centuries.^  This,  of  course, 
tended  to  raise  prices  and  encourage  speculative 
ventures. 

As  the  number  of  banks  rapidly  increases  to 
supply  the  demand  for  credit  accommodation, 

'  Conant,  supra,  p.  703. 


246  PRACTICAL  BANKING 

and  even  —  when  optimism  is  running  high  — 
precede  the  demand  and  further  bolster  optimism 
and  the  capitahzation  of  prospects,  we  shall  not 
be  surprised  to  note  the  increase  from  1893,  with 
9492  banks  having  a  capital  of  $1,091,800,000 
and  a  surplus  of  $689,300,000,  to  1906,  with 
17,905  banks  having  a  capital  of  $1,565,300,000 
and  surplus  of  $1,558,900,000.  In  the  same  pe- 
riod bank  notes  increased  from  $155,100,000 
to  $510,900,000,  and  loans  and  discounts  from 
$4,368,600,000  to  $9,893,700,000.  ^  Thus,  the 
total  banking  capital  increased  in  about  the  same 
ratio  as  loans  and  discounts.  The  great  demand 
for  credit  made  the  increase  in  bank-note  circu- 
lation profitable.  Although  in  the  case  of  national 
banks,  the  reserves  bore  a  definite  and,  on  the 
whole,  satisfactory  relation  to  gold,  the  laws 
regarding  state  banks  and  trust  companies  were 
lax,  permitting,  in  most  cases,  an  inadequate 
reserve  and  a  reserve  which  might  even  be  held 
in  bank  notes.  As  a  matter  of  fact,  in  the  years 
immediately  preceding  1907,  the  liabilities  of 
state  banking  institutions  increased  thirty-five 
times  as  rapidly  as  cash  reserves,  while  bank  notes 
increased  two  and  one  half  times  as  rapidly  as 
cash  reserves.  "  As  these  bank  notes  are  secured 
by  evidences  of  the  public  debt  and  not  to  any 
appreciable  extent  by  gold  reserves,  it  becomes 
apparent  how  one  form  of  credit  was  built  upon 
another,  until  the  whole  fabric  became  a  house  of 
cards  which  a  zephyr  might  topple  in  ruins."  ^ 

^  Re-port  o/  the  Comptroller  oj  the  Currency,  1913.   The  figiires  for 
surplus  include  also  profits. 
*  Conant,  supra,  p.  707. 


CRISES  IN  THE  UNITED  STATES     247 

But  after  all,  the  bank  conditions  are  but 
reflections  of  the  business,  commercial,  and  in- 
dustrial condition  of  the  country.  The  fever  of 
enterprise  continued  to  fix  capital  more  and  more 
in  permanent  investments  until  a  time  came 
when  there  was  no  longer  capital  for  expansion; 
then,  to  every  one's  chagrin,  there  was  not  enough 
to  supply  the  demand  for  a  continuance  of  mer- 
cantile transactions.  Our  monetary  system  did 
not  provide  a  method  for  converting  mercantile 
transactions  into  security  for  currency;  in  order 
to  extend  credit  on  mercantile  transactions, 
banks  must  have  a  cash  reserve  or  a  currency 
reserve  based  ultimately  on  an  outlay  of  cash.  It 
is  estimated  that  in  1905  there  were  outstanding 
securities  in  the  United  States,  including  the 
public  debt,  equal  at  their  par  value  to  $35,000,- 
000,000.^  In  the  first  six  months  of  1907  not 
less  than  $1,279,000,000  of  new  securities  were 
authorized  and  put  on  the  market.^ 

There  began  to  be  premonitions  of  a  liquida- 
tion. Professor  F.  W.  Taussig,  in  the  spring  of 
1907,  delivered  an  address  before  the  Economics 
Club  of  New  York  on  "  Panics,"  in  which  he  de- 
plored the  fact  that  commercial  banks  had  lost 
their  ideal,  which  he  said  was  to  occupy  a  "judi- 
cial position,  standing  aloof  from  other  business 
than  that  of  banking  proper."  He  said  the  tend- 
ency of  the  t>anks  had  been  to  become  associated 
with  investment  houses  and  private  firms  promot- 
ing new  business  ventures,  with  trust  companies 
and  men  whose  primary  business  was  other  than 
that  of  banking.   In  May,  Mr.  F.  A.  Goddard, 

'  Conant,  swpra,  p.  702.  ^  Financial  Age,  July  8,  1907. 


248  PRACTICAL  BANKING 

president  of  the  Fort  Dearborn  National  Bank  of 
Chicago,  said  to  the  Missouri  Bankers'  Associa- 
tion: "What  I  want  to  get  at  is  this:  we  are  in 
somewhat  of  an  epidemic  of  money-mad  conta- 
gion and  excitement.  .  .  .  These  prosperous  times 
have  brought  to  the  front  all  kinds  of  propositions 
and  schemes  for  investment  —  some  legitimate, 
some  a  mere  chance,  and  some  fakes."  About 
this  time  Mr.  Eugene  V.  Debs,  the  Socialist,  pro- 
phesied an  era  of  financial  depression,  to  be  at- 
tended, he  said,  "by  great  railroad  strikes." 

On  April  29,  1907,  in  an  editorial,  the  Financial 
Age  said :  — 

When  the  course  of  values  on  the  New  York  Stock 
Exchange  first  assumed  a  clearly  established  downward 
trend,  the  Financial  Age  ventured  the  opinion  that  a 
business  recession  was  being  discounted.  During  the 
past  few  weeks  there  has  been  a  growing  disposition 
on  the  part  of  commentators  to  take  cognizance  of 
certain  happenings  which  previously  they  were  in- 
clined to  overlook  entirely  or  else  treat  as  matters  of 
little  importance.  They  now  observe  that  several  of 
our  large  railroad  corporations  are  retrenching  in  many 
directions,  canceling  orders  for  new  equipment,  and 
modifying  their  plans  for  terminal  and  other  improve- 
ments; it  is  remarked  also  that  reports  from  iron  and 
steel  centers  tell  of  a  slight  falling-off  in  the  consump- 
tion of  these  products,  while  the  market  for  copper 
metal  is  losing  some  of  the  remarkable  strength  that 
has  characterized  it  during  the  past  year  or  two.  Deal- 
ers in  automobiles  and  other  luxuries,  it  is  also  ad- 
mitted, are  doing  a  somewhat  smaller  business  than 
formerly,  while  railroad  earnings  do  not  compare  at 
all  favorably  with  those  of  the  corresponding  period 
in  1906. 


CRISES   IN   THE   UNITED   STATES     249 

Any  of  these  developments,  taken  singly,  may  not 
indicate  any  general  change  in  the  state  of  trade,  but 
collectively  may  quite  properly  be  regarded  as  fore- 
shadowing a  slackening  in  the  speed  with  which  our 
business  machine  has  been  driven  in  the  last  half- 
dozen  years. 

On  May  13  the  same  paper  pointed  out  that  rail- 
roads could  borrow  money  for  improvements 
only  by  paying  extortionate  rates  of  interest:  — 

It  is  a  striking  commentary  on  the  present  state  of 
their  credit  that  the  railroads  cannot  raise  funds  for 
extensions  and  improvements  and  for  other  purposes 
by  the  sale  of  stocks  and  bonds  the  same  as  in  former 
years. 

The  early  months  of  1907  saw  the  disintegra- 
tion of  the  real  estate  boom,  especially  about 
New  York.  Even  new  buildings  were  almost 
without  tenants,  and  second  mortgages,  usually 
desirable,  went  begging.  Bankers  were  warned 
by  the  financial  papers  to  reduce  their  loans  based 
on  real  estate,  as  the  trying  second  part  of  the 
year  would  find  this  kind  of  security  even  harder 
to  convert. 

The  situation  in  the  middle  of  the  year  was 
peculiar.  Superficially  conditions  were  favorable, 
there  being  lower  rates  for  short-time  and  call 
money  than  for  some  time  past.  But  long-time 
loans  could  only  be  made  at  high  rates. 

Heavy  exportations  of  gold  were  made  to 
London  and  Paris  and  bank  reserves  were  unusu- 
ally low  as  July  1  approached.  Tightening  money 
conditions  continued  throughout  June  and  July. 
The  Treasury  withdrew  $30,000,000  government 
deposits.  Early  July  saw  a  bull  effort  to  "  boost" 


250  PRACTICAL  BANKING 

certain  stocks  on  the  market.  About  the  same 
time  James  J.  Hill  spoke  regretfully  of  national 
extravagance.  The  meager  increase  in  savings 
banks  deposits  was  cited. 

Some  fright  was  caused  in  the  New  York  Stock 
Exchange  by  the  Administration's  declaration 
that  "trust-busting"  would  continue;  it  was 
heightened  by  the  attacks  on  railroads  in  the 
South.  There  were  distinct  signs  of  a  panic  on 
the  Exchange,  although,  in  the  face  of  unprece- 
dented slumps  in  prices,  there  were  but  three  fail- 
ures on  the  Exchange  in  the  first  six  months  of  1907. 

It  was  felt  in  every  circle  that  business  trem- 
bled on  the  edge  of  an  abyss.  Wavering  public 
confidence  was  assigned  as  the  cause,  and  finan- 
ciers, as  well  as  financial  papers,  endeavored  by 
argument  and  persuasion,  to  allay  fear.  Mr.  A. 
Barton  Hepburn,  then  president  of  the  Chase 
National  Bank,  said  in  June  that,  although  credit 
had  been  used  too  freely,  the  country  was  in  fine 
condition  and  that  he  believed  the  danger  of  a 
disastrous  slump  was  past. 

Under  title  of  "  Two  Kinds  of  Hysteria,"  the 
Financial  Age,  August  19,  1907,  assured  its  read- 
ers that  the  hot  August  days  were  responsible  for 
the  uncertain  conditions.   It  said :  — 

When  the  silly  season  has  passed  and  the  autum- 
nal breezes  sweeten  the  tempers  of  the  corporation 
baiters  and  ease  the  brows  of  the  Wall  Street  pessi- 
mists, they  will  realize  that  this  is  n't  such  a  bad  coun- 
try after  all,  and  that  it  still  has  a  good  many  genera- 
tions of  prosperity  ahead  of  it.^ 

^  The  attitude  of  bankers  and  financiers  was  sharply  divided 
between  those  who  were  "  pro- Administration  "  and  those  who  were 


CRISES   IN   THE   UNITED   STATES     251 

Toward  the  latter  part  of  August,  realizing 
what  a  strain  the  continued  stringency  would 
prove  to  business,  Secretary  Cortelyou  began 
making  deposits  in  banks  and  accepting  as 
security  state,  municipal,  and  railroad  bonds. 
At  the  same  time  the  Curtiss-Leggett  Company, 
shirt  manufacturers,  failed,  on  account  of  the 
money  stringency,  having  assets  of  $3,000,000 
against  liabilities  of  only  $1,100,000. 

Beginning  with  September  there  was  a  tone  of 
ill-concealed  fright  among  the  most  hopeful.  The 
financial  papers  still  attempted  to  coax  investors 
back  into  the  old  confidence.  "  All  will  be  well  in 
sixty  days." 

During  the  second  week  in  October  call  loans 
in  New  York  ranged  from  two  and  a  haK  to  six 
per  cent;  time  loans  from  six  to  seven  per  cent; 
commercial  paper  from  seven  to  seven  and  a  half 
per  cent.  In  these  two  weeks  there  were  twice  as 
many  failures  as  in  the  same  period  of  1906. 
According  to  Dun's  Review,  there  were  five  times 
as  many  manufacturing  failures  in  September, 
1907,  as  in  September,  1906. 

A  series  of  bank  failures  precipitated  the  spec- 
tacular part  of  the  crisis  of  1907. 
The  first  intimation  of  a  serious  upheaval  in 
New  York  was  the  failure  of  the  Stock  Exchange 
firm  of  which  Mr.  Otto  C.  Heinze  was  the  head. 
In  an  effort  to  corner  the  copper  market  this  firm 
was  embarrassed  by  having  cartloads  of  stock 

"anti-Administration."  Jacob  11.  Schiff,  of  Kuhn,  Loeb  &  Com- 
pany, said  the  tightness  was  due  to  overcapitalization.  Ex-Secre- 
tary of  the  Treasury  Leslie  M.  Shaw  said  that  economic  legislation 
had  destroyed  public  confidence. 


252  PRACTICAL  BANKING 

delivered  to  it;  it  suspended.  There  was  a  well- 
defined  suspicion  that  Mr.  F.  Augustus  Heinze, 
president  of  the  Mercantile  National  Bank,  was 
interested  in  his  brother's  ventures  and  that  his 
bank  was  being  "used"  in  this  connection. 
Heinze's  supposed  allies  —  Messrs.  E.  R.  and 
O.  P.  Thomas  and  C.  W.  Morse  —  fell  into  public 
distrust.  Depositors  began  rapid  withdrawals. 
Seven  banks  and  a  trust  company,  with  capital 
and  surplus  of  $21,000,000  and  deposits  of  more 
than  $71,000,000,  were  dominated  by  these  inter- 
ests. Believing  them  unable  to  weather  the  storm 
the  Clearing  House  Association  agreed  to  help 
them  out  if  Heinze,  Morse,  and  the  Thomases 
were  eliminated.  This  was  done;  it  was  hoped 
on  Sunday,  October  20,  that  a  panic  had  ceased 
to  threaten.  On  Tuesday,  however,  the  National 
Bank  of  Commerce  refused  to  clear  any  longer  for 
the  Knickerbocker  Trust  Company,  whose  presi- 
dent was  thought  to  be  allied  with  the  Morse 
interests.^  The  result  was  a  run  on  the  Knicker- 
bocker Trust  Company  which  —  after  paying  out 
$8,000,000  in  three  hours  —  closed  its  doors. 
Runs  followed  on  the  Lincoln  Trust  Company, 
which  was  forced  to  suspend,  and  on  the  Trust 
Company  of  North  America.  Following  several 
conspicuous  commercial  failures,  such  as  some  of 

1  Some  radical  writers  have  suggested  that  the  only  trouble  with 
Heinze,  Thomas,  and  Morse  was  that  they  had  formed  a  chain  of 
banks  too  formidable  to  suit  the  "Wall  Street  crowd,"  and  so  were 
punished.  Also,  that  the  run  on  the  Knickerbocker  Trust  Company 
was  part  of  this  plan,  which  included  an  effort  of  the  United  States 
Steel  Corporation  to  obtain  control  of  the  Tennessee  Coal,  Iron  and 
Railroad  Company.  See  Twentieth-Century  Socialism,  by  Edmund 
Kelly. 


CRISES   IN   THE   UNITED   STATES     253 

the  Westinghouse  companies  and  the  closing  of 
the  Pittsburgh  Stock  Exchange  on  October  23, 
other  banks  in  New  York  closed  for  safety's  sake. 

Meanwhile,  the  money  scramble  began.  ^  Banks 
in  New  York  were  forced  to  try  to  call  loans  in 
order  to  be  prepared  for  the  demands  of  banks 
and  individual  depositors.  The  Secretary  of  the 
Treasury  had  a  conference  with  Messrs.  Morgan, 
Stillman,  Vanderlip,  Banker,  and  Rockefeller. 
The  result  was  the  deposit  of  $35,000,000  in  na- 
tional banks  in  New  York  in  four  days. 

Stock  Exchange  prices  were  veritably  collaps- 
ing. On  Thursday,  October  24,  a  syndicate, 
headed  by  the  late  J.  P.  Morgan,  stated  that  they 
would  stand  under  the  market  and  placed 
$25,000,000  on  call  at  ten  per  cent;  on  Friday 
$10,000,000  more  was  made  available  at  fifty 
per  cent,  the  high  price  being  fixed  to  discourage 
speculation,  as  money  ranged  from  fifty  to  one 
hundred  and  thirty  per  cent.  Up  to  this  time 
New  York  bank  reserves  had  been  but  little  dis- 
turbed, the  government  deposits  about  offsetting 
withdrawals.  But  on  October  26,  the  banks 
began  to  restrict  cash  payments;  clearing-house 
loan  certificates  were  issued.  The  demand  for 
cash  started  a  currency  premium  the  next  week, 
prices,  for  small  denominations  especially,  going 
to  four  per  cent.  Indeed,  this  premium  continued 

*  See  the  following  news  item:  "Boston,  Mass.,  Nov.  25,  1907. 
One  of  the  city's  banks  made  an  arrangement  with  the  Harvard 
Athletic  Association  to  take  over  all  the  bills  and  silver  taken  in 
exchange  for  tickets  to  the  Harvard- Yale  football  contest.  A  pre- 
mium of  3.8  per  cent  is  to  be  paid  which  will  net  something  over 
$1000  by  the  transaction.  The  arrangement  was  a  result  of  the 
scarcity  of  currency  here." 


254  PRACTICAL  BANKING 

the  rest  of  the  year.  It  offered  an  incentive  for 
withdrawals  of  deposits.  Two  large  failures  oc- 
curred at  this  time,  the  Southern  Steel  Com- 
pany, capitalized  at  $25,000,000,  and  the  Arnold 
Print  Works,  with  liabilities  of  $8,500,000,  the 
two  employing  about  ten  thousand  men.  Money 
stringency  was  assigned  as  the  cause.  On 
November  9  arrived  the  first  shipment  of  more 
than  $100,000,000  in  gold,  imported  to  relieve 
the  money  stringency.  The  banks  had  also  in- 
creased their  circulating  notes  at  this  time. 

But  in  the  mean  time  the  panic  had  seized  the 
interior.  Banks  in  most  of  the  cities  of  over 
twenty-five  thousand  population  suspended  cash 
payments.  The  clearing  houses  stood  guaranty 
on  certificates.^  It  is  estimated  that  over  $500,- 
000,000  of  substitute  paper  was  issued.^  Those 
country  banks,  having  no  clearing-house  affilia- 
tions, were  likely  to  suffer  most.  Many  failures 
occurred  among  them. 

Shipments  of  money  to  the  West  from  New 
York  continued.  For  the  week  ending  October  19 
these  amounted  to  $4,400,000 ;  the  next  week  it 
was  $16,300,000;  the  week  of  November  2  it  was 
about  $17,000,000,  November  9  about  $17,400,- 
000,  November  16  about  $22,600,000,  and  so  on 
till  the  last  of  December  in  gradually  declining 
quantities.  In  the  week  ending  January  4  the 
tide  turned  and  $5,500,000  was  shipped  to  New 
York.     According  to  Mitchell  ^  this  was  three 

1  See  chapter  on  the  "Clearing  House." 
^  Dr.  A.  Piatt  Andrew. 

^  Mitchell,  supra.  Many  of  the  interesting  figures  from  now  on  are 
from  this  excellent  work. 


CRISES   IN   THE   UNITED   STATES    255 

weeks  later  than  the  usual  turning  of  the  tide. 
The  New  York  banks  supplied  the  country  with 
$125,000,000  between  the  beginning  of  the  panic 
and  the  first  of  1908.  Nevertheless,  the  reserves 
of  the  Clearing-House  banks  were  never  lower 
than  19.98  per  cent  of  the  deposits,  the  importa- 
tions of  gold  and  the  federal  deposits  having 
almost  offset  the  loss  of  cash.  Local  drains  were 
the  real  causes  of  the  drop  in  reserves.^ 

Domestic  exchange  was  paralyzed,  New  York 
drafts  selling  from  sixty  cents  discount  to  ten 
dollars  premium  in  different  parts  of  the  country, 
and  being  absolutely  unsalable  in  San  Francisco 
part  of  the  time. 

As  for  foreign  exchange,  the  ordinary  rules 
applying  were  suspended.  Drafts  on  London 
were  bought  when  the  export  point  had  been 
passed,  the  reason  prompting  buyers  being  their 
ability  to  sell  gold  at  a  premium. 

Common  stocks  fell,  as  did  preferred  stocks 
and  bonds,  although  not  to  so  low  a  point.  By 
the  first  of  the  year  securities  took  a  brighter 
outlook  on  life.  In  addition  to  the  $35,000,000 
syndicate    pool    to    sustain    the    stock    market, 

1  Between  September  30  and  the  first  of  the  year  almost  $120- 
000,000,  representing  money  derived  from  importations  of  gold  and 
Treasury  deposits,  was  put  into  circulation.  If  this  could  have  been 
used  as  a  forty  per  cent  cash  reserve  for  emergency  currency,  further 
secured  by  commercial  paper,  $300,000,000  of  new  circulating  notes 
could  have  been  added,  almost  enough,  together  with  $84,000,000 
new  national  bank  circulation,  to  have  prevented  the  necessity  of 
clearing-house  loan  certificates  and  the  restriction  of  payments. 
And  this  would  have  been  what  might  have  been  added  merely  from 
the  addition  to  the  supply  of  cash  reserve  in  the  banks.  Under  the 
new  Federal  Reserve  Act  some  such  arrangement  will  be  possible. 
It  would  have  had  tiie  added  value  of  encouraging  the  discounting 
of  commercial  paper  which  suffered  most  in  New  York  in  the  panic. 


256  PRACTICAL  BANKING 

New  York  national  banks  increased  loans  and  dis- 
counts some  $63,000,000  between  August  22  and 
December  3,  1907.^  This  increase  was  to  replace 
the  loans  contracted  by  the  trust  companies  and 
banks  outside  the  Clearing  House,  and  to  prevent 
a  further  collapse  of  securities.  Of  the  $63,000,000 
$54,000,000  was  of  Stock  Exchange  origin,  show- 
ing, as  Mr.  Mitchell  observes,  the  lack  of  liquid- 
ness  of  the  New  York  call  loan. 

Reserves  piled  up  in  the  country  banks.  Be- 
tween August  22  and  December  3,  New  York 
City  national  banks  lost  $41,700,000,  Chicago, 
$12,100,000;  St.  Louis,  $5,800,000;  and  the  other 
reserve  cities  $27,700,000,  while  the  country 
banks  gained  $46,400,000.  On  December  3  re- 
serves in  New  York  equaled  20.5  per  cent  (25  per 
cent  par);  in  Chicago,  23.1  per  cent  (25  per  cent 
par) ;  in  St.  Louis,  19.6  per  cent  (25  per  cent  par) ; 
in  other  reserve  cities,  12.9  per  cent  (12.5  per  cent 
par);  and  in  country  banks  9.9  per  cent  (6  per 
cent  par).^ 

Perhaps  the  panic  could  have  been  localized 
had  New  York  bankers  been  able  to  meet  all 
demands  without  restriction.  But  restriction 
inspired  country  banks  with  a  zeal  to  provide  for 
any  disaster.  Hoarding  followed.  In  December 
most  country  banks  had  higher  reserves  than  at 
the  beginning  of  the  panic.  The  question,  of 
course,  is,  Could  the  New  York  banks  have  con- 
tinued cash  payments?  They  did,  to  some  extent, 
in  1873.    They  did  not  in  1907.    Therefore,  the 

^  National  banks  outside  of  New  York  contracted  loans  and  dis- 
counts about  $156,000,000. 
^  Sprague,  supra,  p.  305  et  seq. 


CRISES   IN   THE   UNITED   STATES    257 

practical  question  each  country  banker  asked 
himself  was.  Can  I  afford  to  be  less  cautious  than 
other  bankers  when  I  know  the  psychology  of 
"panics"  and  "runs"  and  the  like  as  I  do? 

The  failures  drop  thick  and  fast  when  the  panic 
is  past.  The  old  financial  battlefield  is  gory  with 
the  slain  and,  what  is  more,  the  trampled.  And 
failures  after  the  depression  sets  in  are  larger  and 
more  important.  From  3635  failures  in  the  last 
three  months  in  1907,  bankruptcies  increased  to 
4909  in  the  first  quarter  in  1908. 

What  the  depression  has  been  since  1907  is 
common  knowledge  and  common  experience. 
The  year  1914,  with  its  elaborate  preparations  for 
currency  rejuvenation  and  with  large  crops  in 
prospect,  and  with  the  iron  and  steel  industry 
showing  distinct  signs  of  "  picking  up,"  seemed 
destined  to  behold  the  general  return  of  the 
country  to  prosperity.  The  European  war  has 
temporarily  and  artificially  raised  the  price  of 
provisions  and  made  certain  crops  like  cotton 
seem  less  profitable  to  their  prospective  owners. 
But  notwithstanding  the  temporary  embarrass- 
ment of  agricultural  lines  and  the  shaky  securities 
situation,  the  ultimate  outcome  of  the  European 
struggle  will  greatly  redound  to  the  benefit  of 
this  country. 


CHAPTER  XX 

THE  FEDERAL   RESERVE  ACT 


In  this  chapter  our  purpose  is  to  indicate  some 
of  the  more  conspicuous  currency  shortcomings 
under  the  National  Bank  Act;  to  outhne  the  plan 
of  the  National  Monetary  Commission,  and  the 
Federal  Reserve  Act;  and  finally,  to  introduce 
criticisms  of  the  new  law  —  to  point  out  what  is  to 
be  expected  of  it  and,  chiefly,  its  advantages. 

Up  to  the  time  of  the  passage  of  the  Owen- 
Glass  Currency  Bill  in  December,  1913,  there 
had  never  been  a  financial  system  in  the  United 
States  worthy  of  the  name.^  The  National  Bank 
Act  had,  indeed,  systematized  bank  notes  and 
raised  them  to  the  level  of  a  respectable  and 
reliable  currency,  but  otherwise  it  had  not  so 
worked  as  to  coordinate  banking  operations;  no 
definite  system  was  produced.  There  were  a  few 
rules  looking  toward  certain  uniform  practices  in 
banking;  the  safety  of  the  depositor  and  the 
standardization  of  the  bank  note  were  more 
nearly  accomplished;  but  no  scheme  had  been 
evolved  to  place  banking  in  closer  touch  with 
agricultural  and  business  activities.  In  fact,  the 
tendency  under  the  act  was  to  encourage  credit 
expansion  on  a  basis  of  stock  exchange  quotations 

1  The  first  and  second  United  States  Banks  had,  indeed,  formed 
the  basis  of  a  quasi-systematic  financial  scheme,  but  they  did  not 
bear  suflBciently  close  relations  to  banking  in  general  to  be  alto- 
gether satisfactory. 


THE  FEDERAL  RESERVE  ACT        259 

rather  than  on  actual  business  transactions;  that 
is,  banking  came  to  have  too  direct  a  connection 
with  the  capitaHzed  earning  power  (sometimes 
fancied  and  represented  by  speculation)  of  great 
corporations  and  too  indirect  a  relation  with  pro- 
duction and  consumption.  This  was  a  hardship 
on  the  corporations  themselves,  for  no  method 
was  open  to  them  for  the  free  discount  of  paper 
representing  the  business  they  carried  on.  Of 
course,  in  times  of  an  abundant  money  market, 
they  could  discount  notes  given  for  commercial 
transactions,  but  when  prosperity  had  built  up 
so  gigantic  a  trade  that  money  began  to  be  short, 
as  is  shown  in  the  chapter  on  "Crises,"  they  had 
difficulty.  This  difficulty  would  have  been  obvi- 
ated could  the  banks  have  expanded  their  ability 
to  extend  credit  by  rediscounting  these  notes  to 
some  bank  of  issue.  But  no  such  bank  was  avail- 
able. The  only  method  was  the  cumbersome  pro- 
cess of  issuing  new  circulating  national  bank  notes, 
based  on  United  States  bonds.  These,  as  we  have 
seen,  were  less  and  less  profitable  to  banks  as 
times  grew  more  prosperous. 

Then  again,  no  satisfactory  method  was  offered 
for  the  utilization  of  reserves.  Each  bank  kept 
its  own  reserves.  Reserves  were  individualized 
and  to  the  extent  to  which  they  were  deposited 
in  reserve  or  central  reserve  cities,  they  ceased  to 
have,  in  reality,  more  than  one  quarter  of  their 
face  value,  —  that  is,  as  actual  reserves,  —  for 
reserve  city  banks  kept  only  twenty-five  per  cent 
reserve  against  these  deposits.  When  country 
banks,  ^  in  times  of  financial  stringency,  demanded 

*  Country  banks  arc  those  not  located  in  reserve  or  central  reserve 
cities. 


260  PRACTICAL  BANKING 

their  balances,  they  were  hkely  to  want  a  large 
part  of  them,  and,  in  time  of  panic,  far  more  than 
twenty-five  per  cent  of  them. 

In  short,  reserve  in  the  reserve  cities  was  not  a 
reliable  reservoir.  This  was  not  because  of  the 
unwillingness  of  reserve  bankers  to  pay,  but 
because  of  their  inability.  In  New  York,  for 
instance,  the  call  loan  grew  up  to  provide  an 
investment  for  funds  for  which  payment  on  de- 
mand might  be  readily  pressed.  The  amazing  dis- 
covery has  been  that  call  loans  have  proved  the 
most  inflexible,  the  most  unliquid,  of  loans.  ^ 
Banks  simply  cannot  afford  to  demand  payment 
—  in  times  of  financial  stringency  —  of  all  call 
loans;  they  support  the  Stock  Exchange;  they 
must  not  be  contracted  suddenly  or  securities 
would  fall,  the  Exchange  would  topple  to  ruin, 
and  collateral  for  most  of  the  loans  made  in  New 
York  would  be  impaired  beyond  reparation.^ 

^  Representative  Bulkley,  in  the  House  of  Representatives,  Sep- 
tember 12,  1913,  said:  "Let  us  keep  clearly  in  mind  the  distinction 
between  a  fixed  investment  and  a  commercial  or  liquid  asset.  Cor- 
porate stocks  and  bonds,  lands  and  buildings,  are  fixed  investments. 
However  valuable  they  may  be,  their  conversion  into  cash  depends 
upon  finding  some  one  who  believes  that  under  all  the  circumstances 
it  will  be  profitable  for  him  to  buy  them  as  an  investment.  Growing 
crops,  goods  in  process  of  manufacture  or  in  transit,  and  mercantile 
stocks  are  commercial  or  liquid  assets,  generally  speaking;  certainly 
they  are  liquid  to  the  extent  that  they  are  products  on  some  stage 
of  the  way  toward  consumption.  The  sale  of  such  products  does  not 
depend  upon  finding  a  willing  investor  and  does  not  have  to  be 
forced,  but  comes  about  naturally  in  response  to  the  ordinary  neces- 
sities of  mankind.  Such  assets  constantly  liquidate  themselves, 
because,  of  necessity,  they  must  be  paid  for  when  consumed." 

^  As  is  shown  elsewhere,  most  of  the  loans  made  in  New  York  are 
based  on  Stock  Exchange  security.  During  the  crisis  in  1907  call 
loans  were  increased  by  the  national  banks  in  New  York  upward  of 
sixty  millions. 


THE  FEDERAL  RESERVE  ACT        261 

We  have  seen  that  under  the  National  Bank 
Act  there  was  no  form  of  domestic  loan  which 
offered  a  means  of  expanding  the  currency  by 
simple,  direct  operation.  Currency  was  more  or 
less  fixed;  at  least,  it  had  no  rational  relation  to 
the  agricultural  and  commercial  needs  of  the 
country.  The  result  was  that,  instead  of  the  cur- 
rency expanding  and  contracting  to  fit  the  legiti- 
mate demands  for  loans,  loans  had  to  expand  and 
contract  to  fit  the  volume  of  credit  which  the 
given  amount  of  currency  justified.^ 

Under  the  national  banking  regime  the  only 
kind  of  loan  which  tended,  in  time  of  financial 
stringency,  to  increase  the  volume  of  currency 
was  "bills  of  exchange  drawn  against  the  ship- 
ment of  products  that  may  be  termed  the  neces- 
saries of  life,  such  as  cotton,  wheat,  corn,  flour, 
and  other  articles,  shipped  abroad."  ^  At  other 
times  this  category  might  be  supplemented  by 
finance  bills  and  bills  drawn  for  the  payment  of 
American  securities.^ 

In  the  next  place,  an  indictment  may  be  drawn 
against  the  system  before  the  passage  of  the 
Federal  Reserve  Act  on  the  ground  of  making  no 
positive  and  reliable  provision,  first,  for  any  busi- 
ness man  who,  at  any  time,  had  merchantable 
commercial  paper,  and  second,  for  the  agricul- 
turist. 

It  is  not  necessary  to  go  into  detail  as  to  the 

^  As  will  be  seen  from  Mr.  Noyes's  analysis,  mentioned  in  the 
chapter  on  "National  Bank  Notes,"  this  form  of  currency  was  not 
coordinated  with  the  upward  or  downward  demand  for  credit. 

^  From  a  speech  of  Senator  Knute  Nelson,  in  the  United  States 
Senate,  December  11,  1913. 

'  See  chapter  on  "Foreign  Exchange."' 


262  PRACTICAL  BANKING 

first  ground.  Every  man  knows  that  there  are 
times  when  the  best  commercial  paper  cannot  be 
sold.  The  failures  of  many  large  solvent  corpora- 
tions may  be  attributed  to  such  situations.  The 
reason  is  not  far  to  seek  and  has  already  been 
hinted  more  than  once.  Business  grows  apace  in 
times  of  prosperity  until  there  comes  a  time  when 
the  banks  cannot  safely  extend  credit  in  a  greater 
ratio  to  lawful  money.  Clearly,  banks  must  either 
discontinue  the  expansion  of  loans  and  discounts 
or  increase  their  cash  supply.  The  only  sure 
method  to  increase  cash  supply  is  by  increasing 
circulating  notes,  but,  as  we  have  seen,  the  issu- 
ance of  national  bank  notes  is  increasingly  unat- 
tractive to  the  banks  as  times  grow  more  booming. 
Plainly,  some  system  was  needed  which  would 
insure  a  sale  for  good,  short-time,  commercial 
paper  at  any  time. 

Now  as  to  the  farmer.  A  member  of  Congress  ^ 
in  1913  said  eloquently:  "The  agricultural  classes 
have  always  been  compelled  to  pay  a  high  rate  of 
interest.  In  my  district  the  farmers  never  could 
borrow  more  than  forty  per  cent  of  values  and  the 
rate  was  from  eight  per  cent  up  —  mostly  up. 
The  poorer  the  man  the  higher  the  interest  that 
is  charged.  In  other  words,  if  he  is  poor,  he  is 
going  to  be  kept  poor." 

But  the  plight  of  the  farmer  was  due  to  the  sys- 
tem. National  banks  were  forbidden  to  make 
any  loans  on  real  estate.  As  to  accommodation, 
during  crop-moving  time,  that  involved  the  fail- 
ure of  the  national  bank  currency  to  respond  to 
seasonal  demands. 

^  Representative  Quin. 


THE  FEDERAL  RESERVE  ACT        263 

Apropos  of  seasonal  demands,  Representative 
Bulkley,  computation  expert  for  the  House  Com- 
mittee on  Money  and  Banking,  said  in  a  speech 
on  September  12,  1913:  — 

It  happens  that  at  the  seasons  when  our  great  agri- 
cultural crops  are  harvested  and  moved,  there  is  need 
for  a  larger  amount  of  currency  in  circulation  than  is 
required  at  other  seasons.  This  is  only  another  way  of 
saying  that  at  these  seasons  the  amount  of  transac- 
tions evidenced  by  the  payment  of  cash  or  currency 
is  larger  in  proportion  to  the  credit  transactions  than 
it  is  at  other  times.  It  is  easy  to  see  that  when  large 
amounts  of  cash  are  drawn  out  of  the  banks  to  pay 
farm  hands  and  for  other  purposes,  the  amount  of 
reserve  money  held  by  the  banks  is  reduced  and 
hence  their  loaning  power  is  impaired,  and  this  is 
the  explanation  of  the  annual  autumn  money  string- 
ency. 

The  banks  can  to  some  extent  protect  themselves 
against  paying  out  their  reserve  money  by  the  issue 
of  national  bank  notes,  but  inasmuch  as  these  notes 
are  based  on  the  fixed  amount  of  United  States  bonds 
bearing  the  circulation  privilege,  and  the  profitable- 
ness of  their  issue  depends  to  some  extent  upon  their 
being  kept  constantly  in  circulation  without  reference 
to  the  country's  demand  for  currency,  it  is  apparent 
that  there  can  be  no  elasticity  in  the  amount  of  such 
notes.  In  other  words,  the  amount  of  our  currency 
does  not  rise  and  fall  in  response  to  the  need  for  it.  It 
is  most  desirable  that  the  amount  of  our  currency 
should  be  made  more  elastic,  because  the  seasonal 
demand  for  currency  is  a  perfectly  normal  and  natu- 
ral thing,  and,  as  has  been  said,  results  only  from  the 
fact  that  at  certain  seasons  it  is  necessary  to  do  a  re- 
latively large  proportion  of  the  country's  business 
with  currency. 


264  PRACTICAL  BANKING 

In  summary,  the  principal  defects  of  the  cur- 
rency and  credit  system  as  worked  out  under  the 
National  Bank  Act  were:  — 

(1)  An  inelasticity  of  the  currency,  bringing 
in  its  train  all  the  dire  consequences  of 
financial  stringencies  and  money  scram- 
bles. 

(2)  An  ineffectual  and  antiquated  use  of  our 
gold  supply,  which  could  never  be  concen- 
trated and  moved  freely  from  place  to 
place  as  occasion  demanded. 

(3)  The  tendency  of  bank  reserves  to  dissolve 
in  times  of  panic. 

(4)  A  lack  of  coordination  of  the  banking  oper- 
ations of  the  country. 

(5)  The  independent  treasury  system,  which 
often  caused  millions  of  gold  to  lie  idle  in 
treasury  vaults  while  business  and  agricul- 
tural interests  cried  for  help. 

II 

A  provision  of  the  Aldrich-Vreeland  Emergency 
Currency  Act  of  May  30,  1908,  created  the 
National  Monetary  Commission,  requiring  it  to 
make  a  comparative  study  of  financial  systems 
throughout  the  world  and  report  to  Congress  a 
feasible  scheme  for  the  reorganization  of  the 
United  States  currency  system.  The  Commis- 
sion's report  was  submitted  to  Congress  on  Jan- 
uary 8,  1912,  and  included  a  plan,  familiarly 
known  as  the  "  Aldrich  scheme,"  for  a  centralized 
coordination  of  the  banking  interests  of  the 
United  States.  The  bill  containing  this  plan  was 
not  passed,  but  it  exhibits  a  step  toward  the 


THE  FEDERAL  RESERVE  ACT        265 

Federal  Reserve  Act  of  December,  1913,  and  so 
deserves  a  short  exposition. 

The  bill  contemplated  the  erection  of  a  Na- 
tional Reserve  Association  with  fifteen  branches, 
representing  fifteen  districts  into  which  the  coun- 
try was  to  be  divided.  Each  district  was  to  be 
subdivided  into  local  associations  consisting  of  at 
least  ten  banks  representing  at  least  $5,000,000 
capital  and  surplus.  Now,  observe  how  the  cen- 
tral control  was  to  be  built  up.  Three  fifths  of 
the  directors  of  each  local  association  were  to  be 
selected  by  member  banks  polling  one  vote  each; 
two  fifths  were  to  be  selected  by  the  banks  cast- 
ing one  vote  for  each  share  of  stock  which  they 
held  in  the  National  Reserve  Association.  (Each 
eligible  bank  in  the  country  was  authorized  to 
subscribe  to  an  amount  of  stock  in  the  National 
Reserve  Association  equal  to  twenty  per  cent  of 
its  paid-up  capital.)  Now,  the  branches  of  the 
National  Reserve  Association  were  each  to  have 
a  board  of  directors,  to  be  elected  by  the  local 
association  in  each  district  as  follows :  one  half  to 
be  elected  on  a  basis  of  one  vote  for  each  associa- 
tion, one  third  to  be  elected  on  a  basis  of  the  stock 
which  the  members  of  each  association  held  in 
the  National  Reserve  Association,  and  one  sixth 
to  be  chosen  by  the  directors  already  selected 
and  to  represent  "the  agricultural,  commercial, 
industrial,  and  other  interests  of  the  district." 
From  this  intermediate  stage  thirty-nine  directors 
of  the  National  Reserve  Association  were  to  be 
elected  as  follows:  fifteen  to  be  elected,  one  by  the 
directors  of  each  hriincl\;fffeen  more  to  be  elected, 
one  by  the  directors  of  each  branch,  fairly  rcpre- 


266  PRACTICAL  BANKING 

senting  the  "agricultural,  commercial,  industrial, 
and  other  interests  of  the  district"  ;  and  finally 
nine  more  to  be  elected  by  the  branches  on  a 
basis  of  one  vote  for  each  share  which  member 
banks  held  in  the  National  Reserve  Association. 
There  were  to  be  seven  ex  officio  members  of  the 
"Big  Board,"  the  Governor  of  the  National 
Reserve  Association  (also  chairman  of  the  board 
of  directors),  two  deputy  governors,  the  Secre- 
taries of  the  Treasury,  of  Agriculture,  and  of 
Commerce  and  Labor,  and  the  Comptroller  of  the 
Currency. 

Now,  the  governor  was  to  be  appointed  by  the 
President,  from  a  list  of  not  less  than  three  to  be 
submitted  by  the  board  of  directors  of  the  Na- 
tional Reserve  Association.  He  might  be  removed 
for  cause  by  two  thirds  of  the  board.  The  two 
deputy  governors  were  to  be  appointed  by  the 
board.  The  managers  and  deputy  managers  of 
the  branches  were  to  be  appointed  by  the  gover- 
nor and  the  manager  was  to  be  chairman  of  the 
board  of  directors  of  his  branch. 

Thus  it  can  be  seen  that  a  highly  centralized 
authority  was  to  be  built  up,  almost  beyond  any 
governmental  supervision,  although  the  Govern- 
ment's funds  and  credit  were  to  support  it.  It 
was  this  feature,  together  with  the  danger  of  a 
small  clique  of  banks  controlling  the  whole, 
which  brought  down  upon  the  bill  unmerciful 
criticism  and  led  to  the  eventual  construction  of 
another  bill  along  somewhat  different  lines. 

The  purpose  of  the  Aldrich  Bill  was,  first,  to 
provide  an  elastic  currency  based,  not  on  govern- 
ment bonds,  but  on  business  transactions  and 


THE  FEDERAL  RESERVE  ACT        267 

representing  automatically  liquidating  assets, 
such  as  notes  or  bills  of  exchange  given  for  the 
sale  of  commodities  or  manufactures;  second,  to 
provide  an  agency  for  regulating  the  flow  of  gold 
by  discount  rates;  third,  to  standardize  foreign 
exchange  transactions. 

These  in  general  are  the  purposes  of  the  new 
Federal  Reserve  Act  and  will  be  more  minutely 
discussed  below.  It  is  not  profitable  to  go  more 
fully  into  the  details  of  the  Aldrich  Bill,  as  it  was 
never  enacted  into  law.  There  was  a  considerable 
feeling  of  suspicion  on  the  part  of  legislators  and 
of  the  public  and  a  disinclination  to  entrust  the 
national  finances  to  a  private  bank;  it  was  feared, 
with  the  substantial  minority  of  the  directors 
which  "big  banks"  would  be  able  to  elect  all  the 
way  up  the  scale,  plus  the  influence  which  their 
size  would  give  them  in  any  event,  that  the  bill 
made  potential  a  "money  trust"  of  the  most 
secure  and  dangerous  variety.  It  was  compared 
to  the  well-known  "holding  company,"  except 
that  here  the  "  big  banks"  would  hold  the  "hold- 
ing company"  instead  of  the  "holding  company" 
holding  the  banks;  which,  after  all,  would  be  the 
most  secure  method. 

In  the  campaign  of  1912  the  Democrats  went 
on  record  as  opposed  to  this  type  of  a  central 
bank.  In  fulfillment  of  platform  pledges  they 
have  enacted  the  Federal  Reserve  Act,  which,  in 
the  large,  is  the  work  of  Secretary  of  the  Treas- 
ury McAdoo,  Senator  Owen,  and  Representative 
Glass.  It  is  an  improvement  on  the  Aldrich  Bill 
in  general  and  has  been  hailed  as  such  by  a  num- 
ber of  leading  economists.  From  the  point  of  view 


268  PRACTICAL  BANKING 

of  the  business  man  and  the  farmer  and  of  most 
banks,  it  offers  immediate  prospects  of  more 
favorable  conditions,  and  after  a  few  years  of 
readjustment  it  will  be  just  as  advantageous  to 
the  reserve  city,  and,  particularly,  the  central 
reserve  city  banks. 

A  great  many  ideas  have  been  borrowed  from 
the  Aldrich  plan  for  the  new  law,  and  the  striking 
differences  consist  in  the  composition  and  con- 
struction of  the  direction  of  the  system.  The 
Aldrich  plan  suggested  a  highly  centralized  bank- 
ing system,  a  highly  centralized  reserve,  a  highly 
centralized  note-issuing  power  —  almost  entirely 
under  the  control  of  the  banks  themselves.  The 
Federal  Reserve  Act  provides  for  decentrahzed 
administration  and  decentralized  reserves  (to  a 
limited  degree),  with  a  central  supervisory  and 
judicial  institution. 

The  Federal  Reserve  Act  designated  the  Secre- 
tary of  the  Treasury,  the  Secretary  of  Agricul- 
ture, and  the  Comptroller  of  the  Currency  as 
an  organization  committee  to  make  preliminary 
plans  for  the  inauguration  of  the  new  system. 
Among  their  first  activities  was  the  division  of  the 
country  into  twelve  regions,  which  should  follow 
as  nearly  as  possible  "the  convenience  and  cus- 
tomary course  of  business"  and  not  necessarily 
state  lines,  and  the  indication  of  a  city  in  each 
district  to  be  the  headquarters  of  the  federal 
reserve  bank  of  that  district.^  But  reserve  and 
central  reserve  cities  under  the  National  Bank 
Act  are  not  changed. 

The  act  contemplates  a  simpler  system  than 

*  See  Appendix  m. 


THE  FEDERAL  RESERVE  ACT        269 

the  Aldrich  plan.  There  are  twelve  federal  reserve 
banks,  one  in  each  of  the  districts.  These  banks 
are  independent  of  each  other  and  each  does  the 
actual  business  of  a  central  bank  in  its  district, 
rediscounting  paper,  making  collections,  carrying 
on  a  foreign  business,  discounting  acceptances, 
and  issuing,  under  the  direction  of  the  Federal 
Reserve  Board,  circulating  notes,  based  on  com- 
mercial transactions,  and  limited  in  amount  only 
by  a  stated  relation  to  the  gold  reserve.  Federal 
reserve  banks  will  establish  appropriate  branches 
in  their  districts.  Above  the  federal  reserve  banks 
is  a  sort  of  supreme  court  and  legislature  of  the 
system,  the  Federal  Reserve  Board,  which  super- 
vises and  systematizes  operations. 

The  act  requires  all  national  banks  and  allows 
all  state  banks,  fulfilling  certain  conditions  herein- 
after recited,  to  enter  the  system.  National  banks 
failing  to  comply  with  these  provisions  within 
sixty  days  after  the  passage  of  the  act  ceased  to 
act  as  reserve  agents  and  those  that  failed  to  com- 
ply within  a  year  lost  their  charters.^ 

Upon  vote  of  fifty-one  per  cent  of  the  shares 
of  its  capital  stock  a  state  bank,  with  sufficient 
unimpaired  capital  to  become  a  national  bank, 
may  be  converted  into  a  national  bank,  with  the 
privileges  and  obligations  of  such,  provided  it 
does  not  contravene  state  law. 

The  Federal  Reserve  Board  will  prescribe 
further  rules  for  the  admission  of  state  banks  as 
members  of  the  federal  reserve  system.  A  few 
provisions  have  been  made  by  the  Organization 

'  Only  twenty-eight  national  banks  failed  to  come  in  within  sixty 
days. 


270  PRACTICAL  BANKING 

Committee.  Applying  state  banks  must  observe 
the  capital  and  reserve  requirements  for  national 
banks;  also  the  National  Bank  Law  respecting 
the  limitation  of  liability  which  may  be  incurred 
by  any  person,  firm,  or  corporation,  the  prohibi- 
tion against  the  purchase  of  or  loan  on  the  stock 
of  national  banks,  and  the  withdrawal  or  impair- 
ment of  capital,  or  the  payment  of  unearned  divi- 
dends. State  banks  failing  to  conform  to  these 
regulations  after  admission  to  the  system  shall 
forfeit  membership.  Their  stock  shall  be  bought 
by  the  appropriate  federal  reserve  banks  and 
canceled. 

Each  bank  entering  the  federal  reserve  system 
must  subscribe  a  sum  equal  to  six  per  cent  of  its 
paid-up  capital  and  surplus  in  the  capital  of  the 
federal  reserve  bank  in  its  district.  Of  this,  one 
sixth  is  payable  on  call,  one  sixth  in  three  months 
thereafter,  and  one  sixth  in  six  months  there- 
after. The  remainder  or  any  part  of  it  is  subject 
to  call  by  the  Federal  Reserve  Board.  Stock  sub- 
scriptions must  be  paid  in  gold  or  gold  certificates. 

No  federal  reserve  bank  can  begin  business 
with  less  than  $4,000,000  capital,  divided  into 
shares  having  a  par  value  of  $100.  If  the  subscrip- 
tions to  the  stock  of  any  federal  reserve  bank,  in 
the  opinion  of  the  Organization  Committee,  are 
insufficient,  the  public  may  be  permitted  to  sub- 
scribe in  blocks  not  greater  than  $25,000  to  one 
subscriber;  if  they  are  still  insufficient,  such  a 
quantity  as  is  necessary  shall  be  allotted  to  the 
United  States  to  be  disposed  of  for  the  benefit  of 
the  United  States  at  not  less  than  par.  Only  stock 
held  by  member  banks  may  vote.   The  shares  of 


THE  FEDERAL  RESERVE  ACT        271 

member  banks  may  not  be  transferred  or  hypothe- 
cated. The  capital  stock  of  the  federal  reserve 
banks  will  automatically  increase  or  decrease  as 
members  are  admitted  or  dropped. 

The  Comptroller  of  the  Currency  designated 
five  applying  banks  in  each  reserve  district  to 
execute  the  organization  certificate  of  the  appli- 
cant banks.  When  this  certificate  was  filed  and 
approved,  the  federal  reserve  bank  of  that  dis- 
trict became  a  body  corporate  with  the  ordinary 
powers  of  a  corporation  and  others  hereinafter 
mentioned. 

Each  federal  reserve  bank  is  to  be  governed  by 
a  board  of  nine  directors  to  be  known  as  Class  A 
(with  three  directors) ,  Class  B  (with  three  direct- 
ors), and  Class  C  (with  three  directors). 

Class  A  and  Class  B  directors  are  to  be  selected 
—  by  preferential  ballot  —  by  the  member  banks, 
the  sole  distinction  between  these  classes  being 
that  Class  A  directors  may,  and  probably  will, 
be  bankers,  while  Class  B  directors  must  be  ac- 
tively engaged  "in  commerce,  agriculture,  or 
some  other  industrial  pursuit."  Class  C  directors 
are  appointed  by  the  Federal  Reserve  Board ;  two 
of  each  group  of  three  must  be  men  of  tested 
banking  experience.  Directors  of  the  federal 
reserve  banks  hold  ofiice  three  years,  provided 
that  the  first  groups  of  directors  so  arrange  their 
terms  that  one  director  of  each  class  shall  be 
selected  each  year. 

One  of  Class  C  directors  shall  be  designated  by 
the  Federal  Reserve  Board  as  chairman  of  the 
board  of  directors  of  his  bank  and  as  federal 
reserve  agent.    Another  Class  C  director  shall 


272  PRACTICAL  BANKING 

be  designated  as  deputy  chairman  and  deputy 
federal  reserve  agent.  The  federal  reserve  agent 
shall  maintain  a  local  office  of  the  Federal  Reserve 
Board  and  shall  act  as  its  official  representative 
in  performance  of  the  functions  conferred  on  it. 
He  shall  receive  a  compensation,  fixed  by  the 
Federal  Reserve  Board  and  paid  by  the  federal 
reserve  bank.^ 

For  the  convenience  of  business,  the  federal 
reserve  banks  are  authorized  to  establish  branches 
where  they  seem  appropriate.  Each  branch  shall 
have  seven  directors,  three  selected  by  the  Fed- 
eral Reserve  Board  and  four  by  the  parent  bank, 
one  of  the  latter  to  be  designated  as  manager. 
Each  group  of  directors  shall  hold  office  during 
the  pleasure  of  the  board  appointing  it. 

Federal  reserve  banks  are  expressly  exempted 
from  all  taxation  whatever  save  tax  on  real  estate. 

After  paying  necessary  expenses  of  operation, 
federal  reserve  banks  may  pay  dividends  of  six 
per  cent  per  annum  and  no  more.  The  remainder 
of  the  net  earnings  shall  be  divided  equally  be- 
tween the  bank's  surplus  account  and  a  franchise 
tax  payable  to  the  United  States.  When  the  sur- 
plus reaches  an  amount  equal  to  forty  per  cent  of 
the  capital  of  a  federal  reserve  bank,  then  the 
entire  net  earnings,  after  paying  dividends,  shall 
be  transferred  to  the  United  States  as  a  franchise 
tax. 

To  unify  the  operations  of  the  federal  reserve 

^  The  act  is  silent  concerning  the  fixing  of  the  salary  of  the  deputy 
federal  reserve  agent,  and  apparently  it  is  to  be  done  by  the  re- 
serve bank,  although  it  would  seem  more  regular  for  it  to  be  fixed 
in  the  same  manner  as  that  of  the  federal  reserve  agent. 


THE  FEDERAL  RESERVE  ACT        273 

banks,  there  is  set  up  the  Federal  Reserve  Board, 
with  headquarters  in  Washington.  It  consists 
of  seven  members,  namely,  the  Secretary  of  the 
Treasury,  the  Comptroller  of  the  Currency,  and 
five  appointees  of  the  President  of  the  United 
States,  who  shall,  after  the  first  group  is  so 
arranged  that  one  term  expires  every  two  years, 
hold  office  for  ten  years.  The  five  appointees 
receive  annual  salaries  of  $12,000  plus  actual 
traveling  expenses.  The  Comptroller  of  the  Cur- 
rency is  to  receive  $7000  additional  for  his  ser- 
vices on  the  board. 

Appointed  members  of  the  board  may  be 
removed  by  the  President  for  cause.  That  vir- 
tually means  that  they  hold  office,  within  the 
limitation  of  their  terms,  during  good  behavior. 

In  Congress  a  bitter  strife  was  waged  over  the 
composition  of  the  board,  a  certain  faction  trying 
to  prevent  the  creation  of  a  "money  trust"  and 
another  endeavoring  to  obviate  a  "political  ma- 
chine." Theoretically,  both  contingencies  have 
been  largely  avoided.^ 

It  is  provided  that  the  Secretary  of  the  Treas- 
ury will  not  lose  any  prestige.  In  the  first  place, 
he  is  ex  officio  chairman  of  the  Federal  Reserve 
Board,  and,  in  the  second  place,  wherever  his 
authority  apparently  conflicts  with  some  power 
delegated  to  the  Federal  Reserve  Board,  it  is 
provided  that  this  power  shall  be  exercised  sub- 
ject to  his  control. 

^  It  is  worth  while  noting  that  the  Aldrich  plan  proposed  to  char- 
ter the  National  Reserve  Association  unqualifiedly  for  fifty  years, 
while  the  Owen-Glass  Act  incorporates  federal  reserve  banks  for 
twenty  years  unless  they  be  dissolved  by  Congress  or  forfeit  their 
charters. 


274  PRACTICAL  BANKING 

A  novel  feature  of  the  system  is  the  creation 
of  the  Federal  Advisory  Council,  consisting  of 
twelve  members,  one  elected  by  each  federal 
reserve  bank.  The  powers  of  this  body  include 
the  right  "to  call  for  information  and  to  make 
recommendations  in  regard  to  discount  rates, 
rediscount  business,  note  issues,  reserve  condi- 
tions, in  the  various  districts,  the  purchase  of 
gold  or  securities  by  reserve  banks,  open-market 
operations  by  said  banks,  and  the  general  affairs 
of  the  reserve  banking  system." 

The  principal  powers  of  the  Federal  Reserve 
Board  are  as  follows :  — 

(1)  To  examine  federal  reserve  banks  and 
member  banks  and  to  publish  weekly 
reports  as  to  the  condition  of  federal  re- 
serve banks. 

(2)  To  permit  or  require,  on  the  affirmative 
vote  of  five  members  of  the  board,  federal 
reserve  banks  to  rediscount  the  discounted 
paper  of  other  federal  reserve  banks  at 
rates  of  interest  to  be  fixed  by  the  board. 

(3)  To  suspend  for  not  more  than  thirty  days, 
with  possible  extensions  of  fifteen  days, 
reserve  requirements. 

(4)  To  supervise  the  issuance  and  retirement 
of  federal  reserve  bank  notes. 

(5)  To  remove  any  officer  or  director  of  any 
federal  reserve  bank  for  cause. 

(6)  To  suspend  and  administer  the  business  of 
any  federal  reserve  bank  for  the  violation  of 
any  provisions  of  the  Federal  Reserve  Act. 

(7)  To  grant  national  banks  the  privilege  of 
doing  a  trust  company  business. 


THE  FEDERAL  RESERVE  ACT        275 

(8)  To  supervise  and  determine  the  discount 
rates   to   be   observed   in   federal   reserve 
banks. 
The  federal  reserve  banks  have,   in   tabular 
form,  the  power :  — 

(1)  To  receive  deposits  from  member  banks  or 
the  United  States;  or,  purely  for  exchange 
purposes,  from  other  federal  reserve  banks. 

(2)  To  discount,  on  the  indorsement  of  a  mem- 
ber bank,  notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transac- 
tions; "that  is,  notes,  drafts,  and  bills  of 
exchange  issued  or  drawn  for  agricultural, 
industrial,  or  commercial  purposes,"  the 
Federal  Reserve  Board  having  the  right  to 
define  eligible  paper,  provided  no  paper 
based  on  staple  agricultural  products  or 
other  goods,  wares,  or  merchandise  shall 
be  barred  and  no  paper  secured  by  stock 
or  bonds,  save  United  States  bonds,  shall 
be  eligible.  Such  discounts  shall  have  not 
exceeding  ninety  days  to  run.  But  paper 
issued  for  agricultural  purposes  or  based  on 
live  stock,  with  not  more  than  six  months 
to  run,  may  be  discounted  at  a  rate  set  by 
the  Federal  Reserve  Board. 

(3)  To  discount  acceptances  based  on  the 
exportation  or  importation  of  goods,  pro- 
vided the  acceptances  have  no  more  than 
three  months  to  run  and  are  indorsed  by  a 
member  bank. 

(4)  To  buy  and  sell  in  the  open  market  cable 
transfers  and  bankers'  acceptances. 

(5)  To  buy  and  sell  the  notes  and  bonds  of  the 


276  PRACTICAL  BANKING 

United  States  and  "bills,  notes,  revenue 
bonds,  and  warrants  with  a  maturity  from 
date  of  purchase  of  not  exceeding  six 
months,  issued  in  anticipation  of  the  receipt 
of  assured  revenues  by  any  State,  county, 
district,  political  subdivision,  or  munici- 
pality in  the  continental  United  States, 
including  irrigation,  drainage,  and  recla- 
mation districts,  such  purchases  to  be  made 
in  accordance  with  rules  and  regulations 
prescribed  by  the  Federal  Reserve  Board." 

(6)  "To  establish  from  time  to  time,  subject 
to  review  and  determination  of  the  Fed- 
eral Reserve  Board,  rates  of  discount  to  be 
charged  by  the  federal  reserve  bank  for 
each  class  of  paper,  which  shall  be  fixed 
with  a  view  of  accommodating  commerce 
and  business." 

(7)  To  buy  and  sell,  through  foreign  agencies, 
bills  of  exchange  arising  out  of  actual  com- 
mercial transactions  which  have  not  more 
than  ninety  days  to  run  and  which  bear  the 
signature  of  two  or  more  responsible 
parties. 

The  act  permits  the  Secretary  of  the  Treasury 
to  deposit  all  government  monies,  except  the 
redemption  fund  for  national  bank  notes  and 
federal  reserve  notes,  in  the  federal  reserve  banks, 
reserving  for  him,  however,  the  privilege  of  using 
member  banks  as  depositories. 

One  of  the  greatest  improvements  which  the 
act  endeavors  to  bring  about  is  the  issuance  of 
federal  reserve  notes  based  on  commercial  paper. 
The  Federal  Reserve  Board  is  to  have  general 


THE  FEDERAL  RESERVE  ACT        277 

charge  of  this  operation  and  will  pass  on  applica- 
tions from  federal  reserve  banks  for  federal 
reserve  notes. 

These  notes  may  be  issued  in  denominations  of 
$5,  $10,  $20,  $50,  and  $100,  and  the  notes  of  each 
federal  reserve  bank  shall  have  a  distinctive  mark. 

In  the  matter  of  issuing  notes,  the  federal 
reserve  agent  in  each  federal  reserve  bank  shall 
act  as  representative  of  the  Federal  Reserve 
Board  and  receive  from  the  applying  bank  col- 
lateral in  amount  equal  to  the  sum  of  notes 
applied  for.  At  any  time  the  Federal  Reserve 
Board  may  require  additional  security.  The  col- 
lateral eligible  are  the  notes  and  bills,  accepted 
for  rediscount  from  member  banks,  covering  com- 
mercial, agricultural,  or  industrial  transactions, 
and  acceptances  based  on  the  exportation  or 
importation  of  goods,  all  to  have  not  exceeding 
three  months  to  run. 

These  federal  reserve  notes  are  receivable  by 
national  and  member  banks  and  federal  reserve 
banks,  and  for  all  taxes,  customs,  and  other  public 
dues.  They  are  redeemable  in  gold  at  the  Treas- 
ury or  in  gold  or  lawful  money  at  any  federal 
reserve  bank.  Behind  them  is  pledged  the  credit 
of  the  United  States.  Every  federal  reserve  bank 
must  keep  a  gold  reserve  of  forty  per  cent  against 
all  outstanding  federal  reserve  notes,  including 
such  an  amount  as  the  Secretary  of  the  Treasury 
shall  deem  necessary  (though  not  less  than  five 
per  cent)  to  be  deposited  in  the  Treasury  for 
redemption  purposes.  This  reserve  requirement 
is  the  only  restriction  of  the  amount  of  outstand- 
ing federal  reserve  notes. 


278  PRACTICAL  BANKING 

The  notes  of  one  federal  reserve  bank,  when 
received  by  another,  shall  not  be  paid  out  again, 
but  shall  be  sent  for  credit  or  redemption  to  the 
bank  through  which  they  were  issued. 

"Every  federal  reserve  bank  shall  receive  on 
deposit  at  par  from  member  banks  or  from  federal 
reserve  banks  checks  and  drafts  drawn  upon  any 
of  its  depositors,  and  when  remitted  by  a  federal 
reserve  bank,  checks  and  drafts  drawn  by  any 
depositor  in  any  other  federal  reserve  bank  or 
member  bank  upon  funds  to  the  credit  of  said 
depositor  in  said  reserve  bank  or  member  bank.'* 
The  Federal  Reserve  Board  shall  from  time  to 
time  fix  collection  rates  to  be  charged  by  mem- 
ber banks  for  items  cleared  through  the  federal 
reserve  banks.  These  provisions  will  be  spoken 
of  a  little  later. 

The  act  further  provides  for  the  retirement  of 
national  bank  circulation.  The  bonds  represent- 
ing this  circulation  may,  in  the  discretion  of  the 
Federal  Reserve  Board,  be  allotted  to  the  federal 
reserve  banks  in  due  proportion,  which  shall  form 
the  basis  of  a  note  issue  for  these  federal  reserve 
banks,  subject  to  the  ordinary  conditions  for 
national  bank  notes.  The  federal  reserve  banks, 
however,  may  see  fit  to  exchange  these  bonds 
with  circulation  privilege  for  thirty-year  three 
per  cent  United  States  bonds  and  one-year  gold 
United  States  notes  (three  per  cent)  —  not  more 
than  half  of  the  amount  to  consist  of  the  thirty- 
year  bonds.  The  holders  of  the  one-year  gold 
notes  are  obligated  for  thirty  years  to  buy,  at 
each  expiration  of  these  notes,  an  equal  amount 
of  one-year  gold  notes  of  the  United  States. 


THE  FEDERAL  RESERVE  ACT        279 

The  nature  of  reserves  under  the  new  reserve 
system  will  best  be  comprehended  by  an  examina- 
tion of  the  accompanying  tables.  As  will  be  seen, 
it  is  provided  that  reserves  on  deposit  in  reserve 
city  banks  under  the  old  National  Bank  Law  are 
to  be  withdrawn  gradually  through  three  years. 
During  those  three  years,  the  difference  between 
what  is  carried  in  a  bank's  vaults  and  in  the 
federal  reserve  bank  and  the  amount  of  reserve 
required  may  be  carried  in  reserve  city  banks,  or 
in  the  federal  reserve  banks,  or  in  the  member's 
own  vault  —  all  or  any  part  of  it.  It  will  be  seen 
that,  in  the  case  of  country  banks  and  reserve 
city  banks,  the  amount  to  be  carried  as  reserve 
with  the  federal  reserve  banks  increases  from 
two  twelfths  to  five  twelfths  and  from  three 
fifteenths  to  six  fifteenths  respectively.  Thus  the 
remainder  —  or  optional  part  —  decreases.  These 
changes  take  place  in  periodic  installments  dur- 
ing the  first  three  years.  At  the  end  of  three 
years,  reserves  will  be  arranged  as  follows: 
Country  banks  will  carry  twelve  per  cent  reserve 
on  demand  deposits  and  five  per  cent  on  time 
deposits,^  four  twelfths  of  which  will  be  in  their 
vaults,  five  twelfths  with  their  appropriate  fed- 
eral reserve  banks,  and  the  remaining  three 
twelfths  either  in  their  own  vaults  or  in  the 
Federal  reserve  banks.  Banks  in  reserve  cities 
will  carry  fifteen  per  cent  reserve  on  demand 
deposits  and  five  per  cent  on  time  deposits,  five 

'  "  Demand  deposits  within  the  meaning  of  the  act  shall  comprise 
all  deposits  payable  within  thirty  days,  and  time  deposits  shall  com- 
prise all  deposits  payable  after  thirty  days,  and  all  savings  accounts 
and  certificates  of  deposit  which  arc  subject  to  not  less  than  thirty 
days'  notice  before  payment." 


280 


PRACTICAL  BANKING 


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THE  FEDERAL  RESERVE  ACT        281 

fifteenths  of  which  will  be  in  their  vaults,  six 
fifteenths  with  their  appropriate  federal  reserve 
banks,  and  the  remaining  four  fifteenths  either 
in  their  own  vaults  or  in  the  federal  reserve  banks. 
Banks  in  central  reserve  cities  will  carry  eighteen 
per  cent  reserve  against  demand  deposits  and  five 
per  cent  against  time  deposits,  six  eighteenths  of 
which  shall  be  in  their  own  vaults,  seven  eight- 
eenths with  their  appropriate  federal  reserve  banks, 
and  the  remaining  five  eighteenths  either  in  their 
own  vaults  or  in  the  federal  reserve  banks.  ^ 

Federal  reserve  banks  may  receive  as  reserve 
from  member  banks  such  paper  as  it  is  permitted 
to  discount  in  the  open  market,  but  in  amounts 
not  exceeding  fifty  per  cent  of  any  installment. 

Twice  a  year  examinations  shall  be  held  into 
the  condition  of  member  banks.  In  addition  to 
examiners  appointed  by  the  Comptroller  of  the 
Currency,  the  Federal  Reserve  Board  may 
authorize  state  banking  authorities  to  examine 
state  banks  in  the  system.  The  federal  reserve 
banks  may  conduct  examinations  into  the  condi- 
tion of  their  members.  Once  a  year  the  Federal 
Reserve  Board  shall  cause  each  federal  reserve 
bank  to  be  examined.  On  petition  of  ten  mem- 
ber banks,  a  special  examination  shall  be  held  for 
a  federal  reserve  bank. 

The  two  final  sections  of  the  act  provide,  first, 
for  loans  by  banks  other  than  those  in  central 
reserve  cities  on  improved  and  unencumbered 

1  It  is  provided  that,  where  a  state  bank  or  trust  company  is  re- 
quired by  state  law  to  keep  a  part  of  its  reserve  with  another  state 
bank  or  trust  company,  such  state  bank  or  trust  company  shall  be 
looked  upon  as  a  national  bank  in  reserve  cities  for  a  period  of  three 
years. 


282  PRACTICAL  BANKING 

farm  land  for  not  more  than  five  years;  and 
second,  for  the  estabhshment,  by  member  banks 
having  a  capital  and  surplus  of  $1,000,000,  of 
foreign  branches. 

Additional  advantages  arising  out  of  the  new 
act  are:  (1)  the  privilege  to  member  banks  of 
accepting  drafts  or  bills  of  exchange  based  on  the 
importation  or  exportation  of  goods,  having  not 
more  than  six  months'  sight  to  run;  and  (2)  the 
privilege  of  organizing  national  banks  without 
the  purchase  of  United  States  bonds,  which 
means  the  ability  to  organize  without  having  to 
issue  circulating  notes. 

Ill 

It  but  remains  to  round  off  our  resume  of  re- 
cent currency  legislation  with  a  few  practical  hints 
as  to  the  operation  of  the  new  Federal  Reserve 
Act.  What  will  be  the  effect  on  banking  methods? 
"V^Tiat  will  be  the  probable  effect  on  business? 
These  are  sahent  questions.  By  way  of  answer, 
it  is  the  purpose  to  supplement  our  views  with  a 
diminutive  symposium  of  writers  on  the  subject. 

One  of  the  first  points  noticeable  to  one  familiar 
with  foreign  systems  is  the  great  dissimilarity  of 
organization  of  the  new  American  system  to  that 
of  any  foreign  bank. 

We  have  not  set  up  a  central  bank  at  all,  and 
only  in  a  limited  way  have  we  set  up  twelve  cen- 
tral banks.  Senator  Aldrich  was  pleased  to  call 
his  National  Reserve  Association  a  great  clearing 
house.  At  most,  the  federal  reserve  system  but 
coordinates  and  unifies  the  twenty-five  thousand 
individual  banks  of  the  nation  —  it  does  not  dis- 


THE  FEDERAL  RESERVE  ACT        283 

place  them.  It  was  the  conscious  purpose  of  the 
framers  of  the  bill  to  observe  the  advantages  of 
individual  banking,  such  as  adaptability  to  local 
needs,  the  investment  of  local  capital,  the  interest 
of  local  citizens. 

Now,  the  Federal  Reserve  Act  seeks  to  retain  these 
great,  though  unobtrusive  advantages  of  flexibility 
and  local  interest  while  securing  the  advantages  of  com- 
bined action  in  meeting  strains.  It  centralizes  reserves, 
it  makes  the  currency  elastic,  and  it  provides  for  re- 
discounting  of  commercial  paper;  but  it  does  not  set 
up  a  central  bank  or  remove  the  present  restrictions 
upon  branch  banking.  Accordingly,  as  reorganized 
under  the  new  act,  the  American  banking  system  will 
still  diflPer  from  all  the  great  foreign  systems.  ^ 

What  will  constitute  "commercial  paper"? 
That  is  one  of  the  interesting  and  important  ques- 
tions. Within  very  general  limits  the  Federal 
Reserve  Board  is  to  define  it.  Mr.  Stoddard  Jess  ^ 
thinks  that  "undoubtedly  the  Federal  Reserve 
Board  will  be  inclined  to  give  a  broad  interpreta- 
tion of  the  term  'commercial  paper'  during  the 
period  when  the  banks  and  business  community 
are  adjusting  themselves  to  the  Federal  Reserve 
Act,  but  will  gradually  narrow  down  their  inter- 
pretation until  only  such  paper  will  be  accepted 
as  possesses  a  self-liquidating  quality,  for  only 
such  paper  can  be  considered  as  within  the  spirit 
of  the  act."  We  should  be  inclined  to  think  that 
the  board  would  accept  only  "self-liquidating" 

1  W.  C.  Mitchell,  "The  New  Banking  Measure  in  the  United 
States,"  The  Economic  Journal,  March,  1914. 

2  "Probable  Changes  in  Bank  Methods  under  the  Federal 
Reserve  Act,"  Financial  Age,  January  20,  1914. 


284  PRACTICAL  BANKING 

paper  from  the  start,  since  it  alone  "  can  be  con- 
sidered as  within  the  spirit  of  the  act." 

Some  of  the  changes  in  banking  requirements 
and  practices  will  be :  — 

(1)  A  material  reduction  of  reserves,  as  we 
have  seen,  and  the  division  of  deposits  — 
for  reserve  purposes  —  into  demand  and 
time  deposits.  It  is  also  to  be  noted  that 
certain  parts  of  the  reserves  on  deposit 
with  the  federal  reserve  banks  may  be  paid 
in  discountable  paper  within  the  meaning 
of  section  14  of  the  act.  On  the  other  hand, 
the  reserve  requirement  for  federal  reserve 
banks  will  be  high. 

(2)  The  creation  of  a  collection  department  for 
"transit"  checks.  "It  seems  clear  that 
sections  13  and  16  limit  the  scope  of  the 
collection  business  of  the  federal  reserve 
banks  to  the  handling  of  checks  of  member 
banks,  of  the  United  States,  and  of  other 
federal  reserve  banks."  ^  This  is  more  fully 
discussed  later. 

(3)  Loans  on  farm  lands  by  national  banks. 

(4)  Rediscounting  by  the  federal  reserve  banks. 

(5)  The  gradual  retirement  of  circulating  notes 
by  national  banks. 

(6)  Open  market  operations  by  the  federal 
reserve  banks. 

(7)  The  limitation  of  dividends  of  the  federal 
reserve  banks  and  the  consequent  applica- 
tion of  the  reserve  banks'  energies  to  bet- 
tering banking  accommodations. 

^  Thomas  Conway,  Jr., "  Probable  Changes  in  the  Assets  of  Member 
Banks  under  the  Federal  Reserve  Act,"  Financial  Age,  June  G,  iai4. 


THE  FEDERAL  RESERVE  ACT        285 

(8)  The  provision  for  the  aboHtion  of  the  inde- 
pendent treasury  system,  save  such  part 
of  it  as  is  necessary  to  care  for  the  redemp- 
tion funds. 

(9)  The  issuance  of  federal  reserve  notes  based 
on  the  actual  agricultural,  commercial,  and 
industrial  needs  of  the  country  as  evidenced 
by  "commercial  paper." 

(10)  The  creation  of  a  standard  discount  rate. 

(11)  The  publication  by  the  Federal  Reserve 
Board  of  weekly  reports  of  the  condition 
of  the  federal  reserve  banks,  by  which 
business  conditions  in  various  parts  of  the 
country  maybe  more  intelligently  gauged. 

Under  it  [the  Act]  every  solvent  business  man  who 
can  provide  commercial  paper  of  standard  quality 
should  be  able  to  obtain  bank  loans,  whatever  be  the 
condition  of  business,  by  paying  the  rate  of  dis- 
count. For  practically  every  banking  enterprise  in  the 
country  can  qualify  to  enter  the  system  if  it  so  desires, 
and  every  member  bank  can  rediscount  the  paper  it  has 
bought  with  its  federal  reserve  bank,  and  the  latter 
at  need  may  rediscount  again  with  one  of  its  fellows 
in  another  district.^ 

A  revolution  is  to  be  worked  in  the  collection 
of  checks  on  member  banks  by  the  federal  reserve 
banks.  Under  the  old  system  —  as  we  have  seen 
in  the  chapters  on  "  The  Collection  Department " 
and  "The  Transit  Department"  —  checks  were 
sent  in  indirect  routes  to  take  advantage  of  low 
exchange  rates  and  to  accumulate  balances  in 
certain  cities. 

'  Mitchell,  Economic  Journal,  supra. 


286  PRACTICAL  BANKING 

Checks  on  all  member  banks  shall  be  received  at 
par  by  reserve  banks. 

Reserved  banks  will  also  receive  at  par  or  at  a  very 
slight  charge,  checks  drawn  on  banks  that  are  mem- 
bers of  other  districts,  although  it  is  not  so  stated  in  the 
bill.  It  is  implied  in  the  sentence  providing  that  the 
reserve  banks  can  exchange  with  one  another  checks 
in  their  respective  districts.^ 

Mr.  WoKe  forecasts  the  collection  of  checks 
something  like  this:  Member  bank  A  sends  its 
checks  to  the  federal  reserve  bank  for  collection; 
they  will  immediately  be  credited  to  bank  A, 
but  will  not  count  as  reserve  until  paid.  Checks 
against  bank  A  will  be  charged  to  its  account 
after  they  pass  through  the  reserve  bank  to  bank 
A.  Bank  A  is  thus  saved  the  necessity  of  making 
remittances  for  checks  against  it.  Unpaid  items 
will  be  sent  directly  to  the  bank  which  deposited 
them  with  the  reserve  bank  and  a  charge  ticket 
will  be  sent  to  the  reserve  bank.  Bank  A's  account 
is  then  credited  with  the  unpaid  items  and  the 
depositor's  account  is  charged,  and  the  incident 
is  closed. 

Transfers  of  balances  to  and  from  correspond- 
ents will  simply  be  made  on  the  books  of  the  fed- 
eral reserve  bank;  for  banks  will  still  have  corre- 
spondents to  collect  checks  on  either  member  or 
non-member  banks  and  to  collect  notes,  drafts,  etc. 

The  cost  of  collection  through  the  reserve 
banks,  where  it  is  charged,  will  be  applied  in  a 
manner  quite  the  opposite  of  the  present  practice. 
The  bank  on  which  a  check  is  drawn  will  pay  the 

1  O.  Howard  Wolfe,  "Check  Collection  under  the  Federal  Re- 
serve Act,"  The  Chicago  Banker,  June  20,  1914. 


THE   FEDERAL   RESER\TE   ACT        287 

charges.  Mr.  Wolfe  calculates  that  the  total  cost 
of  collection  will  average  about  ten  cents  per  one 
thousand  dollars,  and  in  time  only  haK  that. 
This  will  prove  an  enormous  saving  to  banks.  As 
a  result  of  the  collection  possibilities  under  the 
new  act,  checks,  "  passing  at  par  or  almost  at  par 
all  over  the  country,  tend  to  produce  an  ideal 
bank  note." 

The  last  proposition  to  which  we  turn  is.  What 
effect  will  this  truly  "business  man's  law"  have 
on  business.'^ 

Under  the  old  system,  as  we  have  said  many 
times  before,  banking  was  too  largely  dependent 
on  speculation.  Rates  of  discount  have  been  con- 
trolled, not  by  the  demand  for  commercial  dis- 
count, but  by  the  call-money  market.  Further- 
more, commercial  transactions  suffered  in  times 
of  crisis  because  bankers  had  to  support  the  then 
inflexible  call  loan  as  far  as  possible.  The  Federal 
Reserve  Act  seeks  to  standardize  commercial 
paper  and  thus  to  insure  a  response  to  the  genu- 
ine industrial  needs  of  the  country. 

Under  the  heading  of  "  How  to  take  Advantage 
of  the  Law,"  Mr.  Henry  P.  Willis  ^  says:  — 

If  the  business  community  contents  itself  with  simply 
continuing  its  present  methods  of  operations,  it  will 
derive  great  advantage  from  the  law.  It  will  find  (1) 
that  local  banks  will  be  able,  by  rediscounting  the 
paper  of  local  enterprises,  to  provide  the  funds  needed 
by  such  enterprises  in  their  operations;  (2)  that  there 
will  be  no  such  wide  fluctuations  of  interest  rates, 
either  geographically  or  from  season  to  season,  as  now 

'  "  Effect  of  Bank  Act  on  Business,"  Rand-McNally  Bankers' 
Monthly,  February,  1914. 


288  PRACTICAL  BANKING 

exists :  (3)  that  there  will  be  no  necessity  of  emergency 
measures  to  safeguard  the  country  from  the  possible 
results  of  financial  panic  or  stringency. 

[But]  to  get  the  full  advantage  of  the  system  the 
business  man  needs  to  arouse  himself  to  a  new  concep- 
tion of  his  functions  and  duties.  He  needs  to  bring  his 
methods  of  borrowing  and  his  view  of  commercial  paper 
into  harmony  with  European  practice,  to  accustom 
himself  to  prompt  payment  of  notes  and  bills  without 
extended  renewals,  and  to  the  putting  of  his  business 
upon  a  short-term  cash  basis.  He  needs  further  to 
familiarize  himself  with  the  idea  of  banking  in  the 
larger  senses  as  distinct  from  a  mere  note-shaving  and 
stock-manipulating  occupation,  and  to  prepare  to  share 
actively  in  the  management  of  the  new  reserve  banks 
and  their  branches,  in  which  important  places  have 
been  reserved  for  him. 

As  to  what  foreigners  think  of  the  new  system, 
the  Financial  Chronicle  quotes  Mr.  Moreton 
Frewen,  a  London  financial  writer :  — 

At  the  close  of  1913  London  anticipated  a  bank  rate 
on  discounts  of  six  per  cent.  It  has  fallen  in  a  fortnight 
from  five  to  three  per  cent.  Why.?  Why  have  consols 
jumped  5  points.''  The  answer  is  the  new  American 
currency  act.  Here  is  Uncle  Sam  with  the  power  of  a 
hundred  Morgans  entering  the  bill-discounting  busi- 
ness and  prepared  to  do  the  world's  business.  There- 
ifore,  every  banker  knows  that  stringency  and  con- 
traction have  disappeared,  and  that  a  new  day  has 
dawned.  The  act  is  a  bigger  thing  by  all  odds  for  the 
world's  trade  than  the  Panama  Canal.  The  passage 
of  the  measure  was  a  greater  discovery  than  half  a 
dozen  African  gold  fields.^ 

^  This  quotation  is  given  by  B.  D.  Harris  in  Rand-McNally 
Bankers'  Monthly,  April,  1914,  under  head  of  "  The  Federal  Re- 
serve Act." 


APPENDIX 


The  following  illustrations  from  the  speech  of 
Representative  Seldomridge  in  the  House  of  Represen- 
tatives, September  11, 1913,  indicate,  with  a  few  minor 
changes,  how  the  Federal  Reserve  Act  proposes  to 
lend  an  elastic  currency:  — 

Jones  is  a  merchant  who  desires  to  borrow  one  thousand 
dollars  from  his  bank  in  order  to  purchase  goods  for  his  fall 
trade.  Under  the  operation  of  this  bill  he  would  take  his 
note  to  his  banker  and  request  the  loan  of  one  thousand 
dollars  for  sixty  days.  The  banker  accepts  his  note  and  the 
transaction  as  far  as  Jones  is  concerned  is  closed  until  the 
note  matures.  Other  merchants  find  themselves  in  need  of 
funds  and  they,  too,  discount  their  paper  with  the  banker. 
Later  on  the  banker  finds  himself  unable  to  meet  the  demand 
made  upon  him  for  loans,  and  in  order  to  meet  these  de- 
mands, which  are  legitimate  and  for  commercial  purposes, 
he  takes  the  notes  made  by  Jones  and  other  merchants  to 
the  federal  reserve  bank  of  his  district  and  offers  them  for 
rediscount.  The  federal  reserve  bank,  finding  that  the  paper 
presented  comes  within  the  provisions  of  the  law,  accepts  it 
for  rediscount,  taking  the  bank's  indorsement  as  security. 
If  the  federal  reserve  bank  finds  itself  unable  to  issue  cur- 
rency for  the  paper  without  encroaching  upon  the  reserve 
requirement  of  this  bill,  it  will  take  the  paper  presented  for 
rediscount  to  the  Federal  Reserve  Board  at  Washington  and 
request  the  issuance  of  Treasury  notes  (federal  reserve  notes) 
to  the  amount  of  paper  presented.  The  Federal  Board  will 
grant  the  request  if  it  is  satisfied  the  security  is  sufficient, 
and  will  issue  the  Treasury  notes  upon  the  indorsement  of 
the  federal  reserve  bank.  The  transaction  is  a  simple  one 
and  the  borrowers  have  received  the  accommodation  desired. 


290  APPENDIX 

which  has  enabled  them  to  purchase  the  goods  for  their 
customers  and  helped  the  producer  to  that  extent. 

Let  us  take  another  illustration :  It  is  harvest  time  in  the 
West;  farmers  are  bringing  their  wheat  to  the  market  and 
are  anxious  to  secure  currency  with  which  to  pay  their  debts 
which  have  accumulated  during  the  winter  and  spring 
months.  The  resources  of  the  banks  have  been  taxed  to  the 
utmost  and  many  bankers  find  themselves  at  the  limit  of 
their  loaning  power.  Under  the  present  law  there  is  no  place 
to  which  they  can  go  for  relief  except  to  the  large  central 
reserve  banks.  It  is  possible  that  they  may  be  able  to  find 
funds  with  which  to  supply  their  customers,  but  these  are 
often  procured  at  an  additional  interest  cost;  or  it  may  be 
that  they  will  find  the  funds  in  the  city  absolutely  unavail- 
able, and  then  the  cry  goes  up  for  help  from  the  Treasury 
Department.  But  what  will  happen  in  this  crop  emergency 
under  the  present  bill?  The  agricultural  bank  will  find  ample 
facilities  for  the  rediscount  of  its  agricultural  paper  and  the 
stress  upon  our  banking  institutions  at  times  of  crop  move- 
ment will  be  largely  relieved.  It  is  a  strange  paradox  that  a 
wealthy  nation  like  ours  should  find  itself  annually  in  a  con- 
dition of  financial  inability  to  meet  the  needs  of  our  agricul- 
tural sections. 

The  currency  which  will  be  issued  against  the  paper 
described  in  the  bill  will  have  back  of  it  several  guarantors; 
First,  it  has  the  liability  of  the  original  maker;  second,  it  has 
the  indorsement  of  the  local  bank,  which  carries  with  it  not 
only  all  of  its  assets,  but  also  the  double  liability  of  its  stock- 
holders; third,  it  has  the  indorsement  of  the  federal  reserve 
bank,  which  carries  with  it  the  assets  of  all  the  member 
banks,  together  with  the  double  liability  of  their  stockholders 
and  also  the  assets  of  the  federal  reserve  bank,  including  a 
gold  reserve  of  thirty-three  and  a  third  [forty]  per  cent; 
and  fourth,  it  has  the  guaranty  of  the  general  Government. 


II 

The  appended  clipping  from  the  New  York  Times  of 
March  4, 1914,  shows  how,  under  the  provisions  of  the 
new  Federal  Reserve  Act,  the  withdrawal  of  required 
reserves,  of  federal  deposits  (if  carried  out),  and  the 
payment  of  stock  subscriptions  to  the  federal  reserve 
banks  would  affect  the  national  banks  of  the  three 
classes  during  the  first  year.  It  indicates  that  none  of 
the  three  divisions  (country,  reserve,  and  central 
reserve)  would,  in  the  aggregate,  have  to  rediscount 
paper  to  pay  their  share  into  the  new  reserve  banks. 

COUNTRY  BANKS 

Commercial  deposits  January  13,  1914 $2,982,076,000 

Reserve  required  against  same,  12  per  cent $357,849,000 

Savings  deposits $755,914,000 

Reserve  required  against  same,  5  per  cent 37,795,000 

Total  reserve  required $395,644,000 

Deposit  in  federal  reserve  banks,  two  twelfths  of  required  reser\'e.  .        $65,940,000 
Capital  and  surplus  January  13,  1914,  $994,066,000  :  3  per  cent  sub- 
scription          29,821,000 

United  States  deposits  January  13,  1914 34,264,000 

$130,025,000 

Withdrawals  would  be 

Two  fifths  from  central  reserve  city  banks $52,010,000 

Three  fifths  from  reserve  city  banks 78,016,000 

$130,025,000 

Present  balances  with  reserve  agents $524,688,000 

Withdrawals 130,025,000 

Leaving  balance  of $394,663,000 

RESERVE  CITY  BANKS 

Commercial  deposits $1,808,770,000 

Less  country  bank  withdrawals 78,015,000 

$1,730/755,000 

Reserve  required  against  same,  15  per  cent $259,613,000 

Savings  deposits $98,696,000 

Reserve  required  against  same,  5  per  cent 4,934,000 

Total  reserve  required $264,547,000 

Deposit  in  federal  reserve  banks  :  three  fifteenths  of  required  reserve        $52,!)0(),()66 

Capital  and  surplus  $447,856,000 ;  3  per  cent  subscription 13,435,000 

United  States  deposiU 33,620,000 

Payment  account  of  reserve  banks $99,970,000 

Payment  account  of  country  banks 78,015,000 

ToUl  payments $177,985,000 


292 


APPENDIX 


Present  cash  holdings 

New  requirement,  six  fifteenths  of  required  reserve . 
Release 


Payment  made  — 

Cash 

From  reserve  agents. 

Total 


Present  balances  with  central  reserve  agents . 

Withdrawals 

Leaving  balance  of 


CENTRAL  RESERVE  CITY  BANKS 


$268,681,000 

105,818,000 

$162,863,000 


$162,863,000 
15,122,000 

$177,985,000 

$278,098,000 
15,122,000 

$262,976,000 


Commercial  deposits  January  13,  1914 $1,579,645,000 

Withdrawals  — 

Country  banks $52,010,000 

City  banks 15,122,000 

Total  withdrawals 67,132,000 

Leaving $1,612,513,000 

Reserve  required  against  same,  18  per  cent 

Savings  deposits $1,244,000 

Reserve  required  against  same,  5  per  cent 

Total  reserve  required 

Deposit  in  federal  reserve  banks  ;   seven  eighteenths  of  required 

reserve 

Capital  and  surplus,  $348,195,000 ;  3  per  cent  subscription 

United  States  deposits 


Payment  required  for  own  account 

Payment  required  for  account  of  reserve  banks. . 
Payment  required  for  account  of  country  banks . 

Total 


Present  cash  holdings,  January  13,  1914 

New  requirement;  eleven  eighteenths  of  required  reserve. 

Release 

Total  payments  required 

Free  balance 


[$272,252,000 

62,000 
$272,314,000 

$105,896,000 

10,445,000 

8,925,000 

$125,266,000 
15,122,000 
52,010,000 

$192,398,006 

$429,198,000 
166,418,000 

$262,78bTob6 
192,398,000 

$70,382,000 


RECAPITULATION 


Banks 

Capital 

Reserve 

U.S.  Deposits 

Total 
payments 

Country    .          

$29,821,000 
13,435,000 
10,445,000 

$65,940,000 

52,909,000 

105,896,000 

$34,264,000 

33,626,000 

8,925,000 

$130,025,000 

99,970,000 

Central  Reserve 

125,266,000 

Total            

$53,701,000 

$224,745,000 

$76,815,000 

$355,261,000 

HOW   PAID 


Banks 


Country 

Reserve 

Central  Reserve 

Total 


Cash 
payment 


By  draft  on 
reserve  banks 


None 
$162,863,000 
192,398,000 


878,015,000 


$355,261,000      $78,015,000 


By  draft  on 
central  re- 
serve banks 


$52,010,000 
15,122,000 


$67,132,000 


m 


SCOPE  AND  STATISTICS  OF  RESERVE  BANK 

DISTRICTS  1 

District  1.  Location  of  reserve  bank,  Boston. 
Capital  at  organization,  $9,931,740;  national  banks  in 
district,  446;  area  of  district  (square  miles),  66,465; 
population  of  district,  6,557,841.  Territory:  Maine, 
New  Hampshire,  Vermont,  Massachusetts,  Rhode 
Island,  and  Connecticut. 

District  2.  Location  of  reserve  bank,  New  York. 
Capital  at  organization,  $20,687,616;  national  banks 
in  district,  478;  area  of  district  (square  miles),  49,170; 
population  of  district,  9,113,279.  Territory:  the  State 
of  New  York. 

District  3.  Location  of  reserve  bank,  Philadelphia. 
Capital  at  organization,  $12,993,013;  national  banks 
in  district,  800;  area  of  district  (square  miles),  39,865; 
population  of  district,  8,110,217.  Territory:  New 
Jersey,  Delaware,  and  all  of  Pennsylvania  east  of 
western  boundary  of  McKean,  Elk,  Clearfield, 
Cambria,  and  Bedford  Counties. 

District  4.  Location  of  reserve  bank,  Cleveland. 
Capital  at  organization,  $11,621,535;  national  banks 
in  district,  724;  area  of  district  (square  miles),  183,995; 
population  of  district,  7,961,022.  Territory:  Ohio,  all 
of  Pennsylvania  not  in  District  3,  the  counties  of 
Marshall,  Ohio,  Brooke,  and  Hancock  in  West  Vir- 
ginia, and  all  of  Kentucky  east  of  western  boundary 
of  Boone,  Grant,  Scott,  Woodford,  Jessamine,  Garrard, 
Lincoln,  Pulaski,  and  McCreary  Counties. 

District  5.  Location  of  reserve  bank,  Richmond. 
1  From  Trust  Companies,  April,  1914. 


294  APPENDIX 

Capital  at  organization,  $6,543,281;  national  banks  in 
district,  475;  area  of  district  (square  miles),  173,818; 
population  of  district,  8,519,313.  Territory:  District 
of  Columbia,  Maryland,  Virginia,  North  Carolina, 
South  Carolina,  and  all  of  West  Virginia  not  in  Dis- 
trict 4. 

District  6.  Location  of  reserve  bank,  Atlanta. 
Capital  at  organization,  $4,702,780;  national  banks  in 
district,  372;  area  of  district  (square  miles),  233,865; 
population  of  district,  6,695,341.  Territory:  Alabama, 
Georgia,  Florida,  all  of  Tennessee  east  of  western 
boundary  of  Stewart,  Houston,  Wayne,  Humphreys, 
and  Perry  Counties;  all  of  Mississippi  south  of  north- 
ern boundary  of  Issaquena,  Sharkey,  Yazoo,  Kemper, 
Madison,  Leake,  and  Neshoba  Counties;  all  of  the 
southeastern  part  of  Louisiana  east  of  western  bound- 
ary of  Pointe  Coupee,  Iberville,  Assumption,  and  Terra 
Bonne  Counties. 

District  7.  Location  of  reserve  bank,  Chicago. 
Capital  at  organization,  $13,115,925;  national  banks 
in  district,  984;  area  of  district  (square  miles),  176,940; 
population  of  district,  12,630,383.  Territory:  Iowa,  all 
of  Wisconsin  south  of  northern  boundary  of  Vermont, 
Sauk,  Columbia,  Dodge,  Washington,  and  Osaukee 
Counties;  all  of  the  southern  peninsula  of  Michigan; 
all  of  Illinois,  north  of  southern  boundary  of  Hancock, 
Schuyler,  Cass,  Sangamon,  Christian,  Shelby,  Cumber- 
land, and  Clark  Counties;  all  of  Indiana  north  of 
southern  boundary  of  Vigo,  Clay,  Owen,  Monroe, 
Brown,  Bartholomew,  Jennings,  Ripley,  and  Ohio 
Counties. 

District  8.  Location  of  reserve  bank,  St.  Louis. 
Capital  at  organization,  $6,219,323;  national  banks  in 
district,  434;  area  of  district  (square  miles),  146,474; 
population  of  district,  6,726,611.  Territory:  Arkansas, 
all  of  Missouri  east  of  western  boundary  of  Harrison, 
Daviess,  Caldwell,  Ray,  Lafayette,  Johnson,  Henry, 


APPENDIX  295 

St.  Clair,  Cedar,  Dade,  Lawrence,  and  Barry  Counties; 
all  of  Illinois  not  in  District  7;  all  of  Indiana  not  in 
District  7;  all  of  Kentucky  not  in  District  4;  all  of 
Tennessee  not  in  District  6;  and  all  of  Mississippi  not 
in  District  6. 

District  9.  Location  of  reserve  bank,  Minneapolis. 
Capital  at  organization,  $4,702,864;  national  banks  in 
district,  687;  area  of  district  (square  miles),  437,930; 
population  of  district,  5,724,893.  Territory:  Montana, 
North  Dakota,  South  Dakota,  Minnesota;  all  of  Wis- 
consin not  in  District  7;  and  all  of  Michigan  not  in 
District  7. 

District  10.  Location  of  reserve  bank,  Kansas 
City.  Capital  at  organization,  $5,594,916;  national 
banks  in  district,  835;  area  of  district  (square  miles), 
509,649;  population  of  district,  6,306,850.  Territory: 
Kansas,  Nebraska,  Colorado,  Wyoming,  all  of  Missouri 
not  in  District  8;  all  of  Oklahoma  north  of  southern 
boundary  of  Ellis,  Dewey,  Blaine,  Canadian,  Cleve- 
land, Pottawatomie,  Seminole,  Okfuskee,  Mcintosh, 
Muskogee,  and  Sequoyah  Counties;  all  of  New  Mexico 
north  of  southern  boundary  of  McKinley,  Sandoval, 
Santa  Fe,  San  Miguel,  and  Union  Counties. 

District  11.  Location  of  reserve  bank,  Dallas. 
Capital  at  organization,  $5,634,091 ;  national  banks  in 
district,  726;  area  of  district  (square  miles),  404,826; 
population  of  district,  5,310,561.  Territory:  Texas,  all 
of  New  Mexico  not  in  District  10;  all  of  Oklahoma  not 
in  District  10;  all  of  Louisiana  not  in  District  6;  and 
the  Counties  of  Pima,  Graham,  Greenlee,  Cochise,  and 
Santa  Cruz  in  Arizona. 

District  12.  Location  of  reserve  bank,  San  Fran- 
cisco. Capital  at  organization,  $8,115,524;  national 
banks  in  district,  514;  area  of  district  (square  miles), 
693,658;  population  of  district,  5,389,303.  Territory: 
California,  Washington,  Oregon,  Idaho,  Nevada,  and 
Utah,  and  all  of  Arizona  not  in  District  11. 


I 


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INDEX 


Acceptance  of  long  bills.  See  For- 
eign exchange,  and  Federal  Re- 
serve Act. 

Aftalion,  A.,  Essai  d'une  theorie 
des  crises  genirales  el  'p^ri- 
odiques,  213,  and  note. 

"Aldrich  scheme,"  a  plan  for  a 
centralized  banking  system, 
264  et  seq.;  description  of  con- 
trol and  management,  265, 266; 
purpose  of  the  proposed  sys- 
tem, 266,  267. 

Aldrich- Vreeland  Act,  tax  on  cir- 
culation, 141;  amendment  by 
Federal  Reserve  Act,  141,  note; 
passage,  156;  notes  issuable  on 
other  security  than  United 
States  bonds,  156;  national 
currency  association,  forma- 
tion and  scope,  157;  direction 
and  management,  157,  158; 
application  for  additional  cur- 
rency, 158;  ratio  of  currency 
to  security,  158;  provisions  for 
non-member  banks,  159;  total 
notes  issuable  under,  159;  ob- 
jections to  the  scheme,  160. 

Andrew,  A.  Piatt,  177,  254. 

Antiquity  of  banking  practices, 
2;  contrast  of  theories  of  con- 
servative and  radical,  2,  and 
note;  Assyria,  4,  5,  and  note; 
Greece  and  Rome,  5, 6;  Europe, 
7  et  seq. 

Assistant  cashier,  43,  44. 

Auditing  bank,  46. 

Bank,  meaning  of  the  word,  7,  8, 
and  note. 

Bankers'  long  bills,  191-95;  lev- 
elers  of  world  interest  rates, 
191;  illustration.  191-93;  prof- 
its arising  from  interest  and  ex- 
change, 193-95. 


Bank  functions,  antiquity  of  loan- 
making,  3  et  seq.;  a  credit  ex- 
changing institution,  15,  16; 
lending  of  credit,  73. 

Banks  not  philanthropic  institu- 
tions, 20. 

Banking  in  France,  John  Law's 
Banque  Generale,  11;  under 
Turgot,  12;  Napoleon  and  the 
Bank  of  France,  12;  figm-es 
for  present  Bank  of  France,  12, 
13;  notes,  146;  French  accom- 
modations for  foreign  corres- 
pondents, 208. 

Banking  in  Germany,  Reichs- 
bank,  11;  other  banks  of  issue, 
11;  notes,  146;  accommoda- 
tions for  foreign  correspond- 
ents, 208,  209;  Filialen,  208. 

Banking  in  Italy,  209,  210. 

Banking  in  the  United  States,  be- 
fore 1781,  13;  Bank  of  North 
America,  its  purpose  and  foun- 
der, 13;  First  Bank  of  the 
United  States,  14,  219;  Presi- 
dent Jackson  and  the  Second 
Bank  of  the  United  States,  14, 
223;  state  banks,  1832-37,  15; 
death  of  the  central  bank  under 
Pennsylvania  law,  15;  New 
York  safety  fund,  15;  indepen- 
dent treasury,  15;  national 
banks,  15;  growth  of  national 
banks,  145;  state  bank.s,  1811- 
18,  223,  228,  229;  national 
banks  and  crisis  of  1873,  236, 
237;  New  York  banks  in  1873, 
235,  230. 

Bank  of  Amsterdam,  formation, 
how  governed,  nature  of  assets, 
9,  10. 

Bank  of  England,  formed,  10; 
notes,  146;  its  functions,  200- 
08. 


302 


INDEX 


Bank  of  Hamburg,  11. 

Bank  of  Netherlands,  10. 

Bank  of  Venice,  origin  and  func- 
tions, 7. 

Bank  ledger.  See  Reciprocal  ac- 
counts. 

Bank  post  remittances,  185. 

Bankrupt,  alleged  meaning  of 
word,  7,  8. 

Baring  failure,  239. 

Beveridge,  W.  H.,  Unemploy- 
ment, 213,  note. 

Bibliography,  297-300. 

Bills  of  exchange.  See  Foreign 
exchange. 

Bill  stamp,  192. 

Branch  banking  in  England,  208. 

Bulkley,  Representative,  260, 
note;  263,  291. 

Burton,  Theodore  E.,  Crises  and 
Depressions,  219,  and  note; 
228,  229. 

Business  poorly  accommodated 
under  National  Bank  Act,  261- 
63. 

Cable  transfers,  194-95. 

Canals,  222. 

Cannon,  James  G.,  Clearing 
Houses,  162,  170,  note. 

Capital  stock,  general  consid- 
eration, 29;  why  it  should  be 
widely  distributed,  29;  account 
on  general  books,  118;  of  na- 
tional banks,  137. 

Cashier,  nature  of  his  functions, 
43;  signing  checks  and  other 
documents,  44,  45,  48;  loan- 
granting  powers,  48;  expense 
items  of  the  bank,  48,  49;  rela- 
tion to  public,  49,  50. 

Central  bank.  See  Aldrich 
scheme,  and  Federal  Reserve 
Act. 

Centralization  of  executive  pow- 
er in  bank,  35. 

Certificates  of  deposit,  127,  128. 

Certification  of  checks,  48. 

Charge  slips,  116. 

Chase,  Salmon  P.,  134,  and  note; 
his  attack  of  financial  situation 


a  currency  problem,  134,  note. 

Checks,  stopping  payment,  57, 
58;  informahties,  63,  65. 

Circulating  notes.  See  National 
Bank  notes.  Federal  Reserve 
Act,  and  Aldrich- Vreeland  Act. 

Clare,  George,  A  B  C  of  the  For- 
eign Exchanges,  193. 

"Clean"  bills,  196,  note. 

Clearing  houses,  regulation  of  ex- 
change rates,  85,  171,  172; 
clearing-house  certificates  as 
reserve,  143;  definition,  161; 
broadest  functions,  162;  New 
York  Clearing  House,  163;  a 
morning's  clearing,  163-65, 
167;  fines,  166;  collections  of 
credits  and  payment  of  debits, 
166,  167;  media  for  payment 
of  balances,  167;  statistics  for 
New  York  Clearing  House,  169; 
more  special  functions,  170, 
171;  possibilities,  170,  note; 
loans  to  government,  171 ;  mu- 
tual assistance  of  members, 
172,  173;  clearing-house  loan 
certificates,  173-75,  236;  other 
certificates,  175-76,  176,  note; 
query  as  to  the  legality  of  these 
other  certificates,  196,  note; 
growth  of  clearing-house  activ- 
ities in  the  United  States, 
176,  177. 

Cleveland,  President,  and  the 
Sherman  Silver  Act,  242. 

Collateral  security,  38,  76. 

Collection  department,  distin- 
guished from  Transit  depart- 
ment, 91;  items  handled  in,  91 
et  seq.;  utility  of,  91;  why  some 
checks  are  sent  through  for  col- 
lection, 92;  indebtedness  liquid- 
ated by  drafts,  93,  94;  collec- 
tion department  notes,  94,  95; 
stocks,  bonds,  mortgages,  etc., 
95,  96;  value  of  reciprocal  ac- 
counts, 110,  111. 

Commercial  letters  of  credit, 
definition,  198;  benefits,  198; 
supposititious    case,    199-202. 

Commercial   long   bills,    nature. 


INDEX 


303 


195,  196,  note;  of  advantage 
to  bankers,  196,  197;  kinds  of 
bills,  197. 

Commercial  paper,  76,  283,  284. 

Commissions  for  accepting  fi- 
nance bills,  192. 

Conant,  Charles  A.,  History  of 
Modern  Banks  of  Issue,  5,  6,  8, 
211,  220;  224,  228,  229,  231, 
240,  241.  244. 

Conway,  Thomas,  Jr.,  284. 

Cooperation  between  banks  and 
their  customers,  20. 

Correspondence  of  the  bank,  44. 

Cortelyou,  Secretary  of  the 
Treasury,  251,  253. 

Counterfeits,  55. 

Credit,  lending  of,  the  vital  func- 
tion of  banking,  73;  balances 
required  on  lines  of  credit,  75. 

Crises  in  the  United  States,  the- 
ories, 212-14,  213,  note,  214, 
note;  Mitchell's  views,  215- 
18;  panic  of  1884  and  financial 
stringency,  see  under  these 
headings. 

Crises  of  1814  and  1818,  govern- 
ment indebtedness  and  trade 
declensions,  219;  state  bank- 
ing, 219,  220;  trade  conditions 
after  1814,  220;  decrease  in 
state-bank  circulation,  220;  a 
depression  due  to  defective 
moneta,ry  system,  221. 

Crisis  of  1837,  preceded  by  great 
territorial  and  business  expan- 
sion, 221;  canals,  222;  popula- 
tion, 222;  land  speculation, 
222,  223;  cotton  lands,  223; 
"pet"  banks  of  Jackson,  223; 
efforts  to  smash  the  Bank  of 
the  United  States,  223;  "specie 
circular,"  224;  speculation  in 
land  the  basis  of  crisis,  224, 
225;  rapid  liquidation  from 
April,  1837,  225,  226;  distress, 
226,  227. 

Crisis  of  1857,  precedent  period 
filled  with  railroad  construc- 
tion, 227-29;  increase  in  bank- 
ing facilities,  228-29;  discov- 


ery of  gold  and  increased  pro- 
duction, 229,  and  note;  failure 
of  crops,  and  great  business 
expansion,  230;  crash,  230, 231; 
suspension  of  specie  payments, 
231;  causes,  231,  232. 

Crisis  of  1873,  accelerated  activ- 
ity after  war,  232,  233;  in- 
creased railroad  facilities,  233; 
securities  at  heavy  discount, 
233;  money  stringency,  233; 
crash,  234;  involved  railroad 
companies  and  security  bank- 
ers, 234;  other  banks,  234,  235; 
closing  of  the  Stock  Exchange, 
235;  action  of  New  York  banks 
in  pooling  reserves,  235 ;  clear- 
ing-house loan  certificates,  236; 
national  banks'  relation  to  cri- 
sis, 236,  237;  imprecedented 
depression,  238. 

Crisis  of  1893,  variety  of  "get- 
rich-quick"  speculations,  239, 
240;  electrical  development, 
240;  land  "booms,"  240;  Eng- 
lish crisis  of  1890  felt  in  1893, 
240;  part  silver  played,  240, 
241;  demand  of  gold  for  silver 
certificates,  241;  sub- treasury's 
action,  241;  gold  exports,  242; 
repeal  of  Sherman  Act,  242; 
bank  failures,  242,  243;  cur- 
rency at  premium,  242;  failures, 
243;  railroads  in  bankruptcy, 
243. 

Crisis  of  1907,  increase  in  mer- 
chandise exported,  244;  great 
lateral  manufacturing  expan- 
sion, 244;  protective  tariff,  245; 
mining  "booms,"  245;  gold 
production,  245;  increase  in 
banking  facilities,  245,  246, 
257;  value  of  securities  out- 
standing, 247;  premonitions 
of  approaching  li((uidutions, 
247-50;  early  failures,  251; 
Mercantile  National  liank  and 
the  Clearing  House,  252;  run 
on  Knickerbocker  Trust  Com- 
pany, 252;  other  runs,  252, 
253;  Morgan  syndicate  places 


304 


INDEX 


$35,000,000  on  call,  253;  cur- 
rency shortage,  253,  and  note; 
other  failures,  253,  254;  panic 
spreads  to  interior  banks,  254 ; 
shipments  of  money  West,  254; 
paralysis  of  exchanges,  255; 
fall  in  prices  of  securities,  255, 
256;  increase  in  call  loans,  256; 
reserves,  256;  New  York  banks, 
action  contrasted  with  that  in 
1873,  256,  257. 

Davis,  Andrew  MacFarland,  on 
the  national  bank,  134,  note. 

Days  of  grace,  78. 

Debs,  Eugene  V.,  248. 

"Del  Credere,"  185. 

Del  Mar,  Alexander,  his  theory 
of  money,  146;  its  fallacies, 
146-48,  note. 

Demand  bills,  190. 

Deposits,  creation  of,  by  lending 
credit,  16,  73,  74;  cash,  17,  73, 
74; individual,  lOiet  seq.;  bank, 
110  et  seq.;  accounts  on  gen- 
eral books,  118  et  seq.;  federal 
deposits,  142. 

Development  of  a  medium  of  ex- 
change, 3;  inconvenience  of 
bullion,  3. 

Dewey,  Davis  Rich,  Financial 
History  of  the  United  States, 
223,  233,  241,  243. 

Directors,  their  duties  and  obli- 
gations, 30,  31;  bank's  policy 
in  their  keeping,  31;  variation 
in  activities  of  directorates,  31 ; 
novel  plan  to  insure  attendance 
at  meetings,  32;  motive  power 
of  bank,  32;  directors  of  na- 
tional banks,  138,  139. 

Directors  of  federal  reserve  banks. 
See  Federal  reserve  banks. 

Discount  rates  {see  Loans  and  dis- 
counts); on  finance  bills,  192. 

Dividends,  payable  by  national 
banks  semi-annually,  144;  by 
federal  reserve  banks,  272. 

Dockery,  A.  M.,  131,  note. 

Documentary  acceptance  bills, 
196,  note. 


Documentary  payment  bills,  196, 
note;  207,  208. 

Domestic  exchange  department. 
See  Exchange  department. 

Drafts  and  checks  sent  at "  cash." 
See  Foreign  cash  items  depart- 
ment. 

Drafts  and  checks  sent  for  "col- 
lection." See  Collection  de- 
partment. 

"Dummies,"  45,  46. 

Embargo,  effect  of,  219. 

Emergency  Currency  Act  of  1908. 
See  Aldrich-Vreeland  Act. 

EngUsh  banking,  10.  See  also 
Bank  of  England. 

Erie  Canal,  222. 

Escher,  Franklin,  Foreign  Ex- 
change, 178,  note. 

European  accounts,  England's 
supremacy,  206;  exchange 
functions  of  Bank  of  England, 
206-08;  the  French  account, 
208;  German  account,  208-09; 
other  accounts,  209. 

Exchange  charges  (see  also  Ex- 
change department,  and  For- 
eign exchange),  65,  85,  89, 100, 
101. 

Exchange  department,  signifi- 
cance of  the  word  "exchange," 
97;  New  York  an  "exchange" 
center,  97;  reason  for  New 
York's  preeminence,  97-99;  ef- 
fect of  federal  reserve  system, 
99,  and  note;  premium  and  dis- 
count on  exchange,  100,  101, 
255;  sources  of  bank's  supply 
of  exchange,  101;  can  be  con- 
ducted profitably,  102;  travel- 
ers' cheques,  102,  103;  value  of 
reciprocal  arrangements,  110, 
111. 

Farm  loans,  281,  282. 

Federal  Advisory  Council,  274. 

Federal  Reserve  Act,  amend- 
ment to  Aldrich-Vreeland  Act, 
141,  note;  limitation  of  5  per- 
cent   redemption    fund,    142, 


INDEX 


S05 


note;  provision  for  liabilities  ex- 
ceeding capital  stock,  144, 145; 
national  banks  not  required 
to  have  circulating  notes, 
150,  note;  open  discount  mar- 
ket, 184,  and  note;  condition  of 
currency  before  passage  of  act, 
258-63;  seasonal  demand  for 
expansion  of  currency,  262, 
263;  reserve  requirements,  279, 
280,  281 ;  does  not  create  a  cen- 
tral bank,  282,  283;  "commer- 
cial paper,"  283,  284;  changes 
in  banking  requirements  and 
practices,  284,  285 ;  how  it  oper- 
ates, 289,  290;  movements  of 
reserves,  291,  292. 

Federal  Reserve  Banks,  organ- 
ization, 268;  regional  banks, 
269;  banks  capable  of  mem- 
bership, 269;  capital  subscrip- 
tion requirements,  270,  271; 
directors,  271,  272;  branches, 
272;  exempt  from  taxes,  272; 
dividends,  272;  powers,  275, 
276;  deposits  of  public  monies, 
276;  notes,  276,  277,  278;  col- 
lections, 278,  285-87;  retire- 
ment of  national  bank  circula- 
tion, 278;  reserve  requirements, 
279-81;  examinations  of  mem- 
ber banks,  281 ;  farm  loans,  281, 
282;  additional  powers,  282; 
federal  reserve  districts,  293, 
295. 

Federal  Reserve  Board,  promul- 
gation of  rules  for  regional 
banks,  269,  270;  a  supreme 
court  of  the  system,  273;  mem- 
bership, 273;  powers,  274,  275. 

Filialen,  208. 

Finance  bills.  See  Bankers'  long 
bUls. 

Financial  stringency  of  1890,  2.39. 

Financial  Age,  245,  219,  283, 
284. 

Fisk  and  Hatch,  failure  of,  234. 

Foreign  cash  items  dcpartrnenl, 
large  volume  of  out-of-town 
items,  84;  use  of  this  depart- 
ment    to     reduce     exchange 


charges,  85,  98;  clearing-house 
regulation  of  exchange,  85; 
"credits"  and  "returns,"  86; 
sending  letters,  86,  87 ;  indorse- 
ment, 87;  remittances,  88;  un- 
pleasant experiences  in  collect- 
ing, 88;  unpaid  items,  89;  pro- 
tested checks  and  drafts,  89; 
relation  to  reciprocal  accounts, 
112;  handled  through  clearing 
house,  170,  note. 

Foreign  exchange,  basis  of,  178; 
settlement  of  international 
debts  and  credits,  178,  179;  the 
market  individualistic,  179; 
items  of  credit  and  debit,  180, 
181;  gold  export  point,  181, 
182,  255;  gold  import  point, 
181,  182,  183,  184;  buying  bul- 
lion in  England  and  United 
States,  183,  184;  European  dis- 
count markets,  184;  accept- 
ance of  long  bills,  184;  "Giro 
Conto,"  185;  "Del  Credere," 
and " Bank  Post"  remittances, 
185;  foreign  department  a  com- 
plete bank,  186;  reasons  for 
conducting  a  foreign  depart- 
ment, 186;  "first"  and  "sec- 
ond" of  exchange,  187;  sharp 
competition  in  the  market,  187; 
fluctuations  on  markets,  187, 
188;  those  who  have  commer- 
cial bills  to  sell,  188;  demand 
for  exchange,  188;  "arbitrag- 
ing  in  exchange,"  189;  illustra- 
tion of  gold's  short  path  to  its 
destination,  189,  190;  free  gold 
markets,  190;  demand  l)ills, 
190;  long  bills,  190,  191;  bank- 
ers' long  bills,  191-94  (  see  also 
under  Bankers'  long  bills);  ca- 
ble transfers,  195;  commercial 
long  bills  (see  Commercial  long 
bills);  commercial  letters  of 
credit,  198-202;  travelers'  let- 
ters of  credit,  203,  200;  Euro- 
pean accounts  (see  European 
accounts);  conclusion,  210. 

Formation    of    national    banks. 
See  National  bunks. 


306 


INDEX 


Fraud,  prevention  of,  by  cashier, 

45;  by  paying  teller,  54,  55. 
Frewen,  Moreton,  288. 

Garnishments,  57. 

General  books,  necessity  of  some 
recapitulation,  118, 119;  gamut 

,  of  general  accounts,  118,  119; 
capital  stock,  119;  surplus  and 
undivided  profits,  119;  loan 
and  discount  account,  120;  in- 
dividual, bank,  and  public  de- 
posits, 120;  cashiers'  checks, 
120;  clearing-house  accounts, 
120;  miscellaneous  accounts, 
120,  121. 

"GiroConto,"  185. 

Glass,  Carter,  267.  -See  also  Fed- 
eral Reserve  Act. 

Goddard,  F.  A.,  before  Missouri 
Bankers'  Association,  248. 

Gold  production,  229,  and  note; 
245. 

Harris,  B.  D.,  288,  note. 
Heinze,  F.  Augustus,  252. 
Heinze,  Otto  C,  251. 
Hepburn,  A.  Barton,  250. 
Hull,  George  H.,  Industrial  De- 
pressions, 214,  note. 

Illinois  Central  Railroad  Com- 
pany, receivership  of,  231. 

Independent  treasury,  adopted, 
15;  abolished  (see  Federal  Re- 
serve Act). 

Individual  ledger,  simple  records 
of  individual  depositors,  104; 
speedy  work  required,  104; 
collateral  duties  of  individual 
bookkeeper,  104,  105;  nature 
of  individual  ledger,  105;  fre- 
quent posting,  105,  106;  book- 
keepers' snares,  105;  balancing, 
three  principal  methods,  107- 
09. 

Indorsed  notes,  79. 

Inexpediency  of  100  per  cent  re- 
serves, 17. 

Interest  and  discount,  76 ;  fluctu- 
ation in  rates,  77;  high  rates 


for  small  loans,  78;  charts  for 
computing,  78,  79;  interest  on 
savings  accounts,  121;  charged 
by  national  banks,  143. 
International  financial  adjust- 
ments, 22.  See  also  Foreign 
Exchange. 

Jay  Cooke  and  Company,  failure 

of,  234. 
Jess,  Stoddard,  283. 
Johnson,  A.  B.,  39. 

Kay,  CuUom  W.,  56. 

Kelly,  Edmund,  Twentieth-Cen- 
tury Socialism,  252,  note. 

Kenyon,  Cox  and  Company,  fail- 
ure of,  234. 

"Kiting,"  45. 

Knickerbocker  Trust  Company, 
run  on,  252. 

Ledger.  See  Reciprocal  accounts, 
and  Individual  ledger. 

Letters  of  credit.  See  Travelers' 
letters  of  credit;  Foreign  ex- 
change. 

Liabilities  of  national  banks 
which  may  exceed  capital 
stock,  144,  145. 

Liability  of  shareholders  in  gen- 
eral, 29. 

Lincoln  Trust  Company,  run  on, 
252. 

Loans  and  discounts,  principal 
divisions,  23,  24;  time  of  ma- 
turity, 24,  40,  78;  loans  on  farm 
lands,  24 ;  call  loans,  25 ;  collat- 
eral, 39, 76;  collection,  40;  man- 
ner of  making  loans  and  dis- 
counts, 73  et  seq.\  rate,  76,  77; 
life  of  paper,  78;  waivers  and 
agreements  in  note  forms,  79; 
indorsements,  79;  protests,  79, 
83;  bank  record  of  loans  and 
discounts  in  register,  ledger, 
and  tickler,  80,  81;  collection 
of  out-of-town  obligations,  82, 
83,  94,  95;  account  on  general 
books,  120. 

Long  bills,  190  et  seq. 


I 
1 


INDEX 


307 


McAdoo,  William  G.,  267. 

McLeod,  H.  D.,  Elements  of  Bank- 
ing, 74r. 

Margraff,  International  Exchange, 
185,  201. 

May,  R.  D.,  Das  Grundgesetz  der 
Wirtschaftskrisen,  213,  note. 

Medium  of  exchange,  develop- 
ment of,  3;  inconvenience  of 
bullion,  3. 

Meetings  of  shareholders,  29. 

Missouri,  Texas  and  Pacific  Rail- 
road Company,  234. 

Mitchell,  Wesley  C,  Business  Cy- 
cles, 211,  212,  215-18,  254; 
Economic  Journal  article,  283, 
285. 

Money  in  the  United  States,  21. 

Money-changers  of  Florence,  7. 

Morgan,  J.  Pierpont,  253. 

Morse,  C.  W.,  251,  and  note. 

Motives  for  organizing  a  bank, 
28. 

National  banks,  15;  a  war  meas- 
ure, 134;  natm-e  of  the  nation- 
al bank  currency,  135;  first 
steps  in  organization,  135, 136; 
Comptroller's  inquiries,  135, 
note;  capital  stock,  137;  in- 
crease or  reduction  of  capital, 
137, 138;  participation  of  share- 
holders, 138;  directors,  138, 
139;  depository  for  United 
States  funds,  142;  interest  on 
federal  deposits,  142;  banks 
classified  according  to  reserve, 
143,  279,  280;  authorized  rate 
of  interest,  143;  incapacity  to 
accept  its  stock  as  collateral, 
144;  limited  ability  to  hold 
realty,  144;  dividends,  144;  lia- 
bilities exceeding  capital  stock, 
144, 145;  growth,  145;  required 
circulation,  150;  not  required 
to  have  circulating  notes  under 
Federal  Reserve  Act,  150,  note; 
278;  purchase  of  bonds,  150;  in 
1873,  230,  237. 

National  bank  notes,  135;  profit 
on  investment,  139,   140;  tax 


on  notes  issued  under  Act  of 
May  30,  1908,  141,  and  note; 
security  for  paper  currency, 
141,  146,  147;  reducing  com- 
mercial values  to  currency, 
147,  148;  super-safety  of  na- 
tional bank  notes,  148,  149;  a 
bank  note  a  guaranteed  I  O  U, 
149;  state  circulation  taxed, 
135,  149;  denominations,  150; 
receivable  for  what,  151 ;  meth- 
od of  redeeming  notes,  151, 
152;  gold  certificates  issued  by 
national  banks,  152;  criticism 
of  national  bank  currency,  153- 
55, 258-60;  awkward  expansion 
and  contraction,  155,  156;  pro- 
visions for  emergency  currency, 
see  Aldrich-Vreeland  Act. 

National  cmrency  associations. 
See  Aldrich-Vreeland  Act. 

National  Monetary  Commission, 
its  formation,  duties,  and  ac- 
complishments, 153,  154;  its 
personnel,  154,  note;  report  of 
Senator  Aldrich,  154. 

New  York,  exchange  center,  97- 
99;  relative  importance  of  New 
York  in  national  bank  depos- 
its, 103. 

New  York  Warehouse  and  Pro- 
duce Company,  234. 

Northern  Pacific  Railroad  Com- 
pany, 234. 

Noyes,  Alexander  D.,  History  of 
the  National  Bank  Currency, 
154-56,  and  156,  note. 

Ohio  Life  Insurance  and  Trust 
Company,  failure  of,  230. 

Overdrafts,  40. 

Owen-Glass  Currency  Bill.  See 
Federal  Reserve  Act. 

Panic  of  1884,  a  financial  spec- 
tacle, 2.38;  causes,  238,  239. 

Paton,  Thomas  B.,  130. 

Paying  teller,  his  department 
pulse  of  the  bank's  policy,  51; 
familiarity  with  signatures  and 
accounts,  51,  52;  his  charge  of 


308 


INDEX 


money  and  vaults,  52,  53;  ne- 
cessity for  clear-headed  teller, 
53;  frauds  and  counterfeits,  54, 
55;  garnishments,  57;  "stop 
payment"  checks,  57,  58;  ex- 
amination of  signatures  on 
day's  checks,  59;  balance,  59. 

Personnel  of  bank  directorates, 
30. 

Postal  savings  banks,  organized, 
130;  provides  for  small  deposi- 
tor, 130;  banlcs  acting  as  reposi- 
tories of  deposits,  130,  132, 
note;  interest,  130;  character 
of  depositors,  131,  note;  statis- 
tics, 131;  note,  132,  note;  con- 
version of  deposits  into  bonds, 
132,  note;  133. 

Powers  of  national  bank.  See 
National  banks. 

Presidencies,  range  of,  36. 

President,  selection,  35;  organ- 
izes work  of  new  bank,  36; 
cares  for  broad  development  of 
bank's  reputation,  36,  37;  his 
extension  of  the  bank's  credit, 
37  et  seq.;  the  dangers  in  lend- 
ing, 38  et.  seq.;  collateral  secur- 
ity, 38;  legal  knowledge,  39; 
necessity  for  completing  work 
each  day,  40,  41;  popular  con- 
ception of  president. 

Promissory  note,  origin,  8. 

Quin,  Representative,  262. 

Railroads,  228. 

Real  estate  mortgages,  76;  abil- 
ity of  national  banks  to  hold, 
144. 

Receiving  tellers,  nimiber  and 
distribution  of  work,  62;  dili- 
gence required  in  discovering 
check  informalities,  63-65 ; 
common  mistakes  in  deposit 
slips,  64;  ambiguous  figures, 
64 ;  collecting  exchange  charges, 
65;  balance,  66-71;  counting 
money,  67-69;  hindrances  to 
speedy  balances  by,  70,  71. 

Reciprocal   accounts,    based   on 


mutual  exchange  of  business 
between  banks,  110;  favorable 
exchange  and  collection  rates, 
110,  111;  accounts  cleared  im- 
mediately on  demand  or  pe- 
riodically, 111,  112;  rulings  of 
the  ledger,  112;  relation  to 
.  transit  department,  112;  checks 
received  from  various  depart- 
ments and  charged,  113;  in- 
terest on  reciprocal  accounts, 
113;  reconcilement  of  accounts, 
114-16;  differences  in  accounts 
explained,  115-17;  "charge 
slips,"  117. 

Regional  banks.  See  Federal  re- 
serve banks. 

Relation  of  lending  to  production 
and  liquidation  to  consump- 
tion, 18. 

Reserve,  nature  of,  19  et  seq.;  re- 
serve under  national  bank  act, 
19,  20,  143;  savings  banks'  re- 
serve, 125;  awkwardness  under 
the  National  Bank  Act,  259. 

Reserve  in  1907  crisis,  256. 

Reserve  under  Federal  reserve 
system,  279-81. 

Reserve  banks.  See  Federal  re- 
serve banks. 

Robinson,  Humphrey,  73,75, 140. 

"Runs"  on  banks.  See  Crises. 

Savings  department,  profitable- 
ness of  savings  accounts  to 
banks,  123;  growth  of  savings 
institutions,  124;  savings  ac- 
counts in  commercial  banks, 
124,  125;  reserve,  125;  charac- 
ter of  savings  deposits,  126; 
schemes  to  induce  savers,  126, 
127;  interest,  127;  certificates 
of  deposit,  127,  128;  organiza- 
tion of  department,  128,  129; 
postal  savings  banks,  see  under 
Postal  savings  banks. 

Scherer,  William,  169,  note;  and 
170,  note. 

Schiff,  Jacob  H.,  251,  note. 

Seldomridge,  Representative, 
287. 


INDEX 


309 


Shaw,  Leslie,  M.,  251,  note. 

Sherman  Silver  Bill,  240,  241, 
repeal  of,  242. 

"Specie  Circular,"  224. 

Sprague,  O.  M.  W.,  History  of 
Crises  under  the  National  Bank- 
ing System,  234,  236,  237,  239, 
256. 

Stock  exchange  and  the  national 
bank,  260,  261. 

Stockholders,  28-30;  of  national 
banks,  138. 

Strauss,  Albert,  Columbia  Uni- 
versity lecture  on  Foreign  Ex- 
change, 182, 183, 190,  193,  194, 
201. 

Surplus  account  on  general  books, 
119. 

Taussig,  F.  W.,  before  Economics 

Club,  247. 
Thomas,  E.  R.,  252,  and  note. 
Thomas,  O.  P.,  252,  and  note. 
Three  VV's,  the  failure  of,   225, 

and  note. 


Transit  department.  See  For- 
eign cash  items  department. 

Travelers'  cheques,  102,  103. 

Travelers'  letters  of  credit,  uses, 
203;  form,  204;  identification, 
205;  how  charges  are  made, 
205,  206. 

Trust  Company  of  North  Ameri- 
ca, run  on,  252. 

Undivided  profits  account  on 
general  books,  119. 

Vanderlip,  Frank  A.,  15,  16,  253. 
Vaults,  52,  53. 
Vice-president,  41,  42. 

Weed,  T.  L.,  131,  note. 

Welldon,  Samuel  A.,  Digestof  State 
Banking  Statutes,  15,  note. 

White,  Horace,  73,  74. 

Willis,  Henry  P.,  287,  288. 

Windom,  Secretary  of  the  Treas- 
ury, 239,  241. 

Wolfe,  A.  Howard,  286,  287. 


y 


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